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LABORATORY  MANUAL 

THEORY  AND  PRACTICE 
OF  ACCOUNTING 


^ 


Fayettb  H.  Elwell,  B.  A.,  C.  P.  A. 

PROFESSOR  OF  ACCOUNTING 
THE  UNIVERSITY  OF  WISCONSIN 


LABORATORY  MANUAL 

THEORY  AND  PRACTICE 
OF  ACCOUNTING 

1921  EDITION 


^ 


Fayette  H.  Elwell,  B.  A.,  C.  P.  A. 

PROFESSok^  OF  ACCOUNTING 

THE  UNIVERSITY  OF  WISCONSIN 


COPYRIGHT.  1921 

BY 

FAYETTE  H.  ELWELL 


The  Parksr  Company 
Madison,  Wisconsin 


PREFACE 

This  revision  of  the  laboratory  manual  for  a  course  in  Theory  and  Practice 
of  Accounting  evidences  the  experiences  gained  in  using  a  problem  manual 
for  several  years. 

The  manual  contains 

1.  A  short  bibliography. 

2.  Text  references  for  some  of  the  subjects  discussed  in  the  course. 

3.  A    classification    of    accounts    for    a    hypothetical    manufacturing 
company. 

4.  A  set  of  problems  with  brief  comments  on   some  of  the  points 
brought  out  in  many  of  the  problems. 

5.  A  set  of  theory  problems. 

From  the  problems  and  questions  presented  are  selected  those  which  com- 
prise the  greater  portion  of  the  laboratory  work  for  the  Course  in  Theory  and 
Practice  of  Accounting  given  in  the  Course  in  Commerce,  University  of 
Wisconsin.  This  supplements  the  laboratory  material  contained  in  the  texts 
and  assigned  readings. 

Some  of  the  problems  are  original  and  the  others  have  been  adapted  from 
or  selected  from  the  Certified  Public  Accountant  examinations  given  in  the 
different  states,  the  American  Institute  of  Accountants'  examinations  and  from 
the  Intermediate  and  Final  examinations  given  in  England.  The  solution  of 
these  problems  furnishes  practice  in  the  application  of  principles  given  in 
the  lectures. 

The  theory  questions  may  be  used  in  recitations  and  discussions.  As 
indicated,  many  of  these  questions  have  been  selected  from  Certified  Public 
Accountant  examinations. 

F.  h.;elwell. 

Madison,  Wis. 
September  15,  1921. 


^ 


452330 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/elwellaccountingOOelwerich 


INDEX  TO  PROBLEMS 


Classification  of  Accounts 

1.  "Wisconsin,  1915. 

2.  Wisconsin,  1919. 

3.  Wisconsin,  1919. 
4. 

5.  Institute,  1917. 

6.  Wisconsin,  1919. 

7.  Wisconsin,  1919. 

8.  Wisconsin,  1917  and  Missouri,  1915. 

9.  Wisconsin,  1919. 

10.  Missouri,  1913. 

Revenue  Accounts 

11.  Institute,  1919. 

12.  Michigan,  1908. 

13.  Ohio,  1916. 

14.  Ohio,  1919. 

15.  Massachusetts,  1917. 

16.  English,  1912. 

17.  English,  1910. 

Working  Capital;  Net  Current  Assets; 
Net  Tangible  Assets 

18.  Wisconsin,  1916. 
19 

20.  Pennsylvania,  1900. 

21.  North   Carolina,   1919. 

22.  Maine,   1917. 

Cash  and  Cash  Items 

23.  Wisconsin,  1917,  and  Ohio,  1918. 

Trade  Acceptances 

24.  Wisconsin,  1918. 

Notes  Receivable 

25.  Wisconsin,    1918. 

Accounts  Receivable 

26.  Wisconsin  in  1918. 

Merchandise  Inventory 

27.  Wisconsin,  1918. 
28. 

Comparative  Balance  Sheets 

.     29.  Illinois,  1907. 

30.  New  York,  1915. 

31.  Kentucky,  1917. 

32.  Illinois,  1906. 

33.  Illinois,  1915. 

34.  Institute,   1919. 
35. 

Criticism  of  Financial  Statements 
36.  Illinois,  1916. 
il.  Massachusetts,  1917. 


Value  of  Stock 

38.  Wisconsin,  1919. 

39.  Wisconsin,  1919. 

Interim  Accoimts 

40.  Missouri,  1914. 

41.  Institute,  1917. 

Partnership  Accounts 

42.  New  York,  1916. 

43.  California,   1908. 

44.  Illinois,  1914. 
45. 

46.  Institute,  1917. 

47. 

48. 

49.  English,  1908. 

50.  English,  1907. 

51.  English,  1900. 

52.  English,  1907. 

53.  Illinois,  1914. 

54.  Wisconsin,  1917. 

55.  English,  1911. 

56.  English,  1908. 

57.  Wisconsin,    1916. 

58.  Illinois,  1910. 

59.  Illinois,  1908. 

60.  Illinois,  1912. 

61.  Illinois,  1910. 

62.  Institute,  1917. 

63.  Illinois,  1910. 

64.  Wisconsin,  1919. 

65.  New  York,  1915  (into  corporation). 

66.  Ohio,  1913  (into  corporation). 

67.  Washington,  1908  (into  corpora- 

tion). 

68.  Ohio,  1918   (into  corporation). 

Opening  Entries — Corporation 

69.  Iowa,  1918. 

Capital  Stock— No  Par  Value 

70.  Wisconsin,  1917. 

71.  Wisconsin,  1919. 

Valuation  of  Goodwill 

72.  Massachusetts,  1914. 
IZ.  Institute,  1919. 

Depreciation 

74.  Wisconsin,   1915-1919;   West  Vir- 

ginia, 1917;  Institute,  1921. 

75.  Ohio,  1918;   Illinois,  1918;  Indiana, 

1918. 

76.  Wisconsin,  1915. 
n.  Illinois,  1910. 
78.  Wisconsin,  1918. 
79. 


80. 
81. 
82. 
83. 
84. 


Wisconsin,  1918. 
Massachusetts,  1914. 


Designing  an  Accounting  System 

85.  Wisconsin,  1916. 

Cash  Requirements 

86.  Wisconsin,  1916. 

Setting  Up  Accounts — Bills  Receivable — 
Bills  Payable 

87.  Illinois,  1913. 

Fire  Insurance  Adjustment 

88.  Illinois,  1907. 

89.  Florida,  1915. 
90. 

91.  Institute,  1920. 

92.  Wisconsin,  1919. 
93. 

Flood  Loss 

94.  New  York,  1914. 

Dividends 

95.  English,  1912. 

96.  Wisconsin,  1918. 

Sinking  Funds 

97.  Iowa,  1918. 

98.  Illinois,  1916. 

99.  Illinois,  1904. 


Bond — Premium  and  Discoimt; 
Amortization 

100.  Wisconsin,  1916. 

101.  Wisconsin,  1917. 

102.  New  York,  1914. 

103.  New  York,  1915. 

104.  Wisconsin,  1914-1915. 

105.  Florida,  1915. 

106.  Kansas  and  Missouri,  1915. 

107.  Michigan,  1915. 

108.  Maine.  1916. 

Capitalization 
109. 
110. 

Consolidation 

111.  Illinois,  1914. 

112.  Wisconsin,  1915. 

113.  Wisconsin,  1918. 

114.  Illinois,  1913. 

115.  Illinois,  1913. 

Ratio  of  Solvency 

116.  New  York,  1915. 

Statement  of  Affairs 

117.  Wisconsin,  1914. 

Business  Statistics 

118.  Wisconsin,  1919. 


REFERENCE  BOOKS 


Theory  and  Practice  of  Accounting 

Bassett,  W.  R. — Accounting-  as  an  Aid  to  Business  Profits. 

Bennett,  R.  J. — Corporation  Accounting. 

Child,  Percy — Partnership  Accounts. 

Cole,  Wm.  Morse — Accounts,  Their  Construction  and  Interpretation. 

Day,  Clarence  M. — Accounting  Practice. 

Dawson,  S.  S. — Accountants  Compendium. 

Dewing — Financial  Policy  of  Corporations. 

Dickenson,  A.  B. — Accounting,  Practice  and  Procedure. 

Dicksee,  L.  R. — Advanced  Accounting. 

Dicksee,  L.  R. — Depreciation,  Reserves  and  Reserve  Funds. 

Dicksee,  L.  R. — Good  Will  and  Its  Treatment  in  Accounts. 

Esquerre,  P.  J. — The  Applied  Theory  of  Accounts. 

Hatfield,  Henry  R. — Modern  Accounting. 

Kester,  R.  B. — Accounting  Theory  and  Practice,  Vols.  I  and  II. 

Lisle,  George — Accounting  in  Theory  and  Practice. 

Lough,  Wm.  H. — Corporation  Finance. 

Lough,  Wm.  H. — Business  Finance. 

Lyons,  Hastings — Corporation  Finance. 

Miner  &  Elwell — Principles  of  Bookkeeping. 

Paton  &  Stevenson — Principles  of  Accounting-, 

Saliers,  Earl — Principles  of  Depreciation. 

Spicer  &  Pegler — Bookkeeping  and  Accounts. 

Sprague,  Charles — The  Philosophy  of  Accounts. 

Sprague  &  Perrine — The  Accountancy  of  Investment. 

Wildman,  John  R. — Principles  of  Accounting. 


SUBJECT  REFERENCES 

The  following  references  on  some  of  the  subjects  included  in  the  course 
will  save  the  student's  time  in  looking  them  up  for  himself  and  in  copying 
them  when  given  during  the  lecture  period.  Particular  attention  is  called  to 
the  fact  that  the  omission  of  various  texts  under  the  subject  headings  should 
not  be  construed  as  meaning  that  such  texts  do  not  contain  material  on 
these  subjects. 

CLASSIFICATION  OF  ACCOUNTS 

Ksqtierre,  131-138.  Miner  and  Elwell,  365-368;  Departmental, 

Hattield,  1-33.  384-386;   Manufacturing,  459-461. 

Kester,  Vol.  11,  563-570. 

REVENUE  ACCOUNTS  AND  OPERATING  STATEMENTS 

Bennett,  338-373.  Kester.  Vol.  II,  477-492;  689. 

Dickinson,  55-74.  Miner  and  Elwell,  325-336;  369-375;  441-448. 

Fsquerre,  430-445.  Paton  &  Stevenson,  192-219. 
Hatfield,  274-292. 


PARTNERSHIP  ACCOUNTS 

Esquerre,  19-27.  Lisle,  194-232. 

Hatfield,  316-334.  Paton   &  Stevenson,  255-268. 

Kestcr,  650-654.  Spicer  &  Pegler. 

FINANCIAL  STATEMENTS  AND   BALANCE  SHEETS 
FORMS   AND    PRINCIPLES    OF   VALUATION 

Cole    109-140.  Hatfield,  35-85;  184-194. 

Dickinson.  1-54.  Kester,   Vol.   II,  60-98. 

Esquerre.   396-429.  Spicer  &  Pegler,  269-286 

DISCUSSION  ON  VARIOUS  ACCOUNTS 
(Excepting  Amortization  and  Good  Will) 

Dickinson.  75-152.  Kester,  Vol.  II,  210-224;  225-240;  241-257; 

Esquerre,  139-185;  221-242;  250-260.  279-296;  297-315;  316-331;  339-355. 

Hatfield,  86-106. 

DEPRECIATION 

Cole,  95-108.  Miner  &  Elwell,  319-322. 

Dickinson,  153-174.  Nicholson  &  Rohrbach's  Cost  Accounting, 

Esquerre,  2>7\-2>7Z;  377-380.  144-162. 

Hatfield,  121-143.  Saliers,  Principles  of  Depreciation. 

Kester,   Vol.   II,  99-209. 

GOOD  WILL 

Dicksee,  Good  Will  and  Its  Treatment  in     Hatfield,  107-118. 

Accounts.  Kester,  Vol.  II,  331-338. 

Esquerre,  243-250.  Lisle.  134-137. 

CAPITAL  STOCK 

Bennett,  16-29;  101-132.  Kester,  Vol.  II,  372-386. 

Esquerre,  28-38;  319-335.  E^aton  &  Stevenson.  269-293. 

Hatfield,  H4-183. 

BONDS 

Bennett.  197-265;  305-319.  Kester.  Vol.  II.  357-367. 

Cole,  see  index.  Louojh,  Business  Finance. 

Dewing,  Financial  Policy  of  Corporations.  Lyons,   Corporation   Finance. 

Dickinson,   116-118;    133-143.  Sprague   &   Perrine,    Accountancy    of   In- 

Esquerre,  336-350.  vestment. 

Journal    of   Accountancy,   see   indices. 

A  MORTIZATION  AND  BOND  PREMIUM  AND  DISCOUN  T 

Bennett,  266-278.  Hatfield,  93-96 

Cole,   159-202.  Journal   of   Accountancy,   see   indices. 

Esquerre,  273-283  <:read  all  of  Chap.  23).       Kester,  Vol.  II,  258-278;  365-369. 

SINKING  FUNDS 

Bennett,  279-304.  Journal   of  Accounlanov,   see   indices. 

Corporation   Finance  Texts.  Kester,  Vol.  II,  276-277;  447-465 

Hatfield,  261-273. 


PROFITS  AND  DIVIDENDS 


Bennett,  133-155. 
Cole,  see  index. 
Dickinson,  see  index. 


Hatfield,  195-232. 

Kester,  Vol.  II,  387-406;  428-446. 


Bennett,  324-337. 
Esquerre,  369-380. 


SURPLUS  AND  RESERVES 


Hatfield,  233-260. 
Kester,  Vol.  II,  407-427. 


Esquerre,  461-473. 
Hatfield,  335-340. 


STATEMENT  OF  AFFAIRS 

Kester,  Vol.  II,  620-639. 


Esquerre,  474-490. 


REALIZATION  AND  LIQUIDATION 

Kester,  Vol.  II,  639-654. 


CLASSIFICATION  OF  ACCOUNTS 

for  the 

ILLUSTRATIVE  MANUFACTURING  COMPANY 

*1.    ASSETS 

*11.  Current  Assets. 
*111.  Cash. 

♦nil.  Cash  on  Hand. 

11111.  Main  Office  Cash   Fund. 

11112.  Sales   Department   Cash   Fund. 

11113.  Purchasing  Department  Cash  Fund. 

11114.  Factory  Cash  Fund. 
♦1112.  Cash  on  Deposit. 

11121.  First  National  Bank. 

11122.  Old  National  Bank. 
*11123.  Second  Ward  Savings  Bank. 

111231.  First  Preferred  Stock  Dividend  Account, 
r  111232.  Second  Preferred  Stock  Dividend  Account. 

111233.  Common  Stock  Dividend  Account. 

*112.  Receivables, 

*1121.  Negotiable  Instruments  Receivable. 

11211.  Trade  Acceptances  Receivable. 

11212.  Customers'  Notes  Receivable. 

11213.  Officers'  Notes  Receivable. 

11214.  Foreign  Bills  of  Exchange  Receivable. 
*1122.  Accounts  Receivable. 

11221.  Customers'  Accounts  Receivable. 
112211.  Reserve  for  Bad  Debts. 

11222.  Officers'  Accounts  Receivable. 

11223.  Employes'    Accounts    Receivable. 
*1123.  Contracts  Receivable. 

11231.  Special  Order  Contracts. 

11232.  General   Order  Contracts. 
*1124.  Subscriptions  Receivable. 

11241.  Subscriptions  to  First  Preferred  Stock. 

11242.  Subscriptions  to  Second  Preferred  Stock. 

11243.  Subscriptions  to  Common  Stock. 


*113.  Inventories. 

♦1131.  Raw  Materials  Inventory. 

11311.  Store  Room  A. 

11312.  Store  Room  B. 
*1132.  Goods  in  Process  Inventory. 

11321.  Department  Number  1. 

11322.  Department  Number  2. 
♦1133.  Finished  Goods  Inventory. 

11331.  Stock  Room  X. 

11332.  Stock  Room  Y. 


10 


♦114.  Funds. 

♦1141.  Depreciation  Funds. 

11411.  Building  Depreciation  Fund. 

11412.  Machinery  and   Equipment   Depreciation   Fund. 

11413.  Furniture  and  Furnishings  Depreciation  Fund. 
*1142.  Sinking  Funds  for  Bond  Redemption. 

11421.  Sinking  Fund  for  First  Mortgage  Bonds. 

11422.  Sinking  Fund  for  Second  Mortgage  Bonds. 
♦1143.  Special  Funds. 

11431.  Plant  Addition  and  Extension   Fund. 

11432.  Contingency  Fund. 

11433.  Workmen's  Welfare  Fund. 

♦lis.  Temporary  Investments. 

♦1151.  Bonds. 

11511.  Government  Bonds. 

11512.  Industrial  Bonds. 
1152.  Stocks. 


♦12.  Fixed  Assets. 
♦121.  Land. 

1211.  Main  Office  Land. 

1212.  Main  Factory  Land. 

1213.  Branch  Factories  Land. 

1214.  Land  for  Employes'  Cottages. 

1215.  Land  Held  for  Investment  and  Future  Requirements. 

♦122.  Buildings  and  Fixtures. 

1221.  Main  Office  Building  &  Fixtures. 
12211.  Reserve  for   Depreciation. 

1222.  Main  Factory  Building  and  Fixtures. 
12221.  Reserve  for  Depreciation. 

1223.  Power  Plant. 

12231.  Reserve  for  Depreciation. 

1224.  Branch  Factories. 

12241.  Reserve  for  Depreciation. 

1225.  Employes'  Cottages. 

12251.  Reserve  for  Depreciation. 

1226.  House  on  Land  Held  for  Investment. 
12261.  Reserve  for  Depreciation. 

♦123.  Machinery  and  Equipment. 

1231.  Main  Factory  Machinery  and  Equipment. 
12311.  Reserve  for  Depreciation. 

1232.  Power  Plant  Machinery  and  Equipment. 
12321.  Reserve  for  Depreciation. 

1233.  Branch  Factories  Machinery  and  Equipment. 
12331.  Reserve  for  Depreciation. 

♦124.  Furniture  and  Furnishings. 

1241.  Main  Office  Furniture  and  Furnishings. 
12411.  Reserve  for  Depreciation. 

1242.  Sales  Department  Furniture  and  Furnishings. 
12421.  Reserve  for  Depreciation. 

1243.  Purchasing  Department  Furniture  and  Furnishings. 
12431.  Reserve  for  Depreciation. 

1244.  Cost  Department  Furniture  and  Furnishings. 
12441.  Reserve  for  Depreciation. 

1245.  Factory  Furniture  and   Furnishings. 
12451.  Reserve  for  Depreciation. 


11 


*125.  Delivery  Equipment. 

1251.  Auto  Trucks,  Type  A. 

12511.  Reserve  for  Depreciation. 

1252.  Auto  Trucks,  Type  B. 

12521.  Reserve  for  Depreciation. 

♦126.  Permanent  Investments. 

1261.  Investments  in  Branch  Factories. 

1262.  Stock  of  Subsidiary  Companies  held  for  Control. 

127.  Organization  Expenses. 

*13.  Intangible  Assets. 

131.  Good  Will. 

132.  Patents. 

133.  Franchises. 

134.  Trade  Marks. 

*14.  Accrued  Assets. 

141.  Accrued  Interest  Receivable. 

142.  Accrued  Rents  Receivable. 

143.  Accrued  Royalties  Receivable. 

♦15.  Deferred  Assets. 

151.  Prepaid  Insurance. 

152.  Discount  on  Second  Mortgage  Bonds. 

153.  Stationery  and  Office  Supplies  Inventory. 

154.  Postage  Inventory. 

155.  Fuel  Inventory. 

156.  Main  Factory  Supplies  Inventory. 

157.  Power  Plant  Supplies  Inventory. 


*2.     LIABILITIES 
*21.  Current  Liabilities. 
*211.  Payables. 

*2111.  Negotiable  Instruments  Payable. 

21111.  Trade  Acceptances  Payable. 

21112.  Creditors'   Notes   Payable. 

21113.  Officers'  Notes  Payable. 

21114.  Foreign  Bills  of  Exchange   Payable. 
♦2112.  Accounts  Payable. 

21121.  Creditors  Accounts  Payable. 

21122.  Officers  Accounts  Payable. 

21123.  Employes  Accounts  Payable. 
2113.  Contracts  Payable. 

♦2114.  Dividends   Payable. 

21141.  Dividends  Payable,  First  Preferred  Stock. 

21142.  Dividends  Payable,  Second  Preferred  Stock. 

21143.  Dividends  Payable,  Common  Stock. 

♦212.  Deposits  and  Fund  Accounts. 

2121.  Locker  Deposits. 

2122.  Workmen's  Welfare  Trust  Fund  Account. 

♦22.  Accrued  Liabilities. 

221.  Salaries  and  Wages  Accrued. 

222.  Accrued  Taxes. 

223.  Accrued  Ppwer  Expense. 

224.  Accrued  Light  Expense. 

225.  Accrued  Telephone  Expense. 

226.  Accrued  Interest  Payable. 

12 


*23.  Funded  Liabilities. 

231.  First  Mortgage   Bonds  Payable. 

232.  Second  Mortgage  Bonds  Payable. 

*24.  Contingent  Liabilities. 

*241.  Discounted  Negotiable  Instruments. 

2411.  Trade  Acceptances  Receivable  Discounted. 

2412.  Customers   Notes   Receivable    Discounted. 

2413.  Officers  Notes  Receivable  Discounted. 

2414.  Foreign   Bills  of  Exchange  Receivable  Discounted. 

242.  Guarantees. 
*243.  Uncompleted  Contracts. 

2431.  Special  Order  Contracts. 

2432.  General  Order  Contracts. 

*2S.  Deferred  Liabilities. 

251.  Premium  on  First  Mortgage  Bonds  Payable. 

252.  Premium  on  Consolidated  Mortgage  Bonds  Payable. 


*3.     PROPRIETARY  INTEREST 

*31.  Capital  Stock. 

311.  First   Preferred   Capital   Stock. 

312.  Second  Preferred  Capital  Stock. 

313.  Common  Stock. 

*32.  Surplus. 

321.  Free  Surplus. 
*322.  Appropriated  Surplus. 

3221.  Reserve  for  Federal  Income  Tax. 

3222.  Reserve  for  State  Income  Tax. 

3223.  Reserve  for  Contingencies. 
♦3224.  Reserve  for  Sinking  Fund. 

32241.  First   Mortgage   Bonds. 
3225.  Reserve  for  Plant  Additions  and  Extensions. 
*3226.  Dividends   Declared. 

32261.  Dividends  Declared  on   First  Preferred  Stock. 

32262.  Dividends  Declared  on  Second  Preferred  Stock. 

32263.  Dividends  Declared  on  Common  Stock. 

*33.  Revenue  Accounts. 

331.  Branch  Factories. 

332.  Manufacturing. 

333.  Trading. 

334.  Administration. 

335.  Financial  Income  and  Expense. 

336.  Appropriation. 

*34.  Suspense  Accounts. 

341.  Cash  Over  and  Under. 


*4.     INCOME 

*41.  Operating  Income. 

411.  Branch   Factory   Income. 

412.  Sales  of  Main   Factory. 

4121.  Main   Factory  Return   Sales  and  Allowances. 


13 


*42.  Non-operating  Income. 

♦421.  Income  from  Sale  of  Fixed  Assets. 

4211.  Sale  of  Investment  Land. 

4212.  Sale  of  Branch  Factory. 

4213.  Sale  of  Auto  Trucks,  Type  C. 

♦422.  Income  from  Sale  of  Subsidiary  Commodities. 

4221.  Sale  of  Boiler  Room  Products. 

4222.  Sale  of  Waste  Paper. 

4223.  Sale  of  Kindling  Wood. 

*423.  Investment  Income. 

4231.  Interest  Earned  on  Government  Bonds. 

4232.  Interest  Earned  on  Industrial  Bonds. 

4233.  Dividends  Received  on  Stock. 

4234.  Rents  Earned  on  Employes  Cottages. 

4235.  Dividends  Received  from  Stock  Held  for  Control. 

4236.  Royalties  Received  on  Patents  from  Subsidiaries. 

*424.  Financial  Income. 

4241.  Interest  Earned  on  Bank  Deposits. 

4242.  Interest  Earned  on  Funds. 

4243.  Merchandise  Discount  on  Purchases. 

4244.  Amortization  of  Premium  on  First  Mortgage  Bonds. 

4245.  Amortization  of  Premium  on  Consolidated  Mortgage  Bonds. 


*5.     EXPENSE 

*51.  Operating  Expense. 

511.  Branch  Factories  Expenses. 

♦512.  Manufacturing  Expenses. 

♦5121.  Prime  Cost. 

♦51211.  Direct  Material. 

512111.  Merchandise  Purchases. 
♦512112.  Purchasing  Department  Expense. 

5121121.  Salaries  and  Wages. 

5121122.  Stationery  and  Office  Supplies. 

5121123.  Testing  Department  Expense. 

5121124.  Heat. 

5121125.  Light. 

5121126.  Telephone  and  Telegraph. 

5121127.  Trade  Catalogues  and  Magazines. 

5121128.  Depreciation  on  Furniture  and  Furnishings. 

5121129.  Miscellaneous   Expenses. 

512113.  Receiving   Department  Expense. 

512114.  Postage,   Freight,   and   Express   Inward. 

512115.  Depreciation  on   Delivery  Equipment. 

512116.  Delivery  Expense  (Inward). 
♦51212.  Direct  Labor. 

512121.  Productive  Labor  Department  Number  1. 

512122.  Productive  Labor  Department  Number  2. 

♦5122.  Factory  Burden. 

♦51221.  General  Departments. 

♦512211.  Department  Number  1. 

5122111.  Superintendence. 

5122112.  Taxes,  Property. 

5122113.  Insurance,  Fire  and  Liability. 
♦5122114.  Repairs. 

51221141.  Building  and  Fixtures. 

51221142.  Machinery  and   Equipment. 

14 


*S122115.  Depreciation. 

51221151.  Building  and  Fixtures. 

51221152.  Machinery  and  Equipment. 

51221153.  Patents  Written   Off. 

51221154.  Furniture  and  Furnishings. 

5122116.  Heat. 

5122117.  Light. 

5122118.  Telephone  and  Telegraph. 

5122119.  Factory  Supplies  Used. 
512211901.  Loss  from  Strikes  and  Lockouts. 

*512212.  Department  Number  2. 

Same  accounts  as  under  Dept.  1. 

♦51222.  Special   Departments. 

*5i2221.  Cost  Department  Expense. 

5122211.  Salaries   and    Wages. 

5122212.  Stationery  and  Office  Supplies. 

5122213.  Employment  Department  Expense. 

5122214.  Heat. 

5122215.  Light. 

5122216.  Telephone  and  Telegraph. 

5122217.  Time  Recording  Machine  Rentals. 

5122218.  Depreciation  on  Furniture  and  Furnishings. 

5122219.  Miscellaneous  Expenses. 
*512222.  Power  Plant  Expense. 

5122221.  Depreciation  on  Power  Plant. 

5122222.  Depreciation    on    Machinery   and   Equipment. 

5122223.  Insurance. 

5122224.  Salaries  and  Wages. 

5122225.  Fuel  and  Water. 

5122226.  Supplies. 

5122227.  Heat. 

5122228.  Light. 

5122229.  Telephone  and  Telegraph. 
*512223.  Store  Room  Expense. 

5122231.  Salaries  and  Wages. 

5122232.  Heat. 

5122233.  Light. 

5122234.  Telephone  and  Telegraph. 

5122235.  Stationery  and  Office  Supplies. 

5122236.  Miscellaneous   Expense. 

*513.  Trading  Expenses. 

*5131.  Departmental  Expenses. 

*51311.  Sales   Department  Expense. 

513111.  Salaries  and  Wages. 

5131111.  Salary  of  Manager. 

5131112.  Salaries  and  Commission  of  Salesmen. 

5131113.  Salaries  of  Clerks. 

513112.  Traveling  Expenses  of  Salesmen. 

513113.  Stationery  and  Office  Supplies. 

513114.  Postage. 

513115.  Catalogues  and  Price  Lists. 

513116.  Entertaining  Customers. 

513117.  Heat. 

513118.  Light. 

513119.  Telephone  and  Telegraph. 

*51312.  Advertising  Department  Expense. 

513121.  Salaries  and  Wages. 

513122.  Stationery  and  Office  Supplies. 
*S13123.  Publicity   Expense. 

5131231.  Newspaper  and  Magazine  Space. 

5131232.  .Billboard  and  Electric  Sign  Space. 

5131233.  Mimeographing  and  Special  Letters. 

1#' 


*51313.  Shipping  Department  Expense. 

513131.  Salaries  and  Wages. 

513132.  Boxes  and  Packing  Cases. 

513133.  Delivery  Expense. 

513134.  Depreciation  on  Delivery  Equipment. 
513135^  Twine  and  Wrapping  Material. 

♦51314.  Credit  Department  Expense. 

513141.  Salaries  and  Wages. 

513142.  Stationery  and  Office  Supplies. 

513143.  Subscriptions  to   Credit  Rating  Services. 

513144.  Heat. 

513145.  Light. 

513146.  Telephone  and  Telegraph. 
513147. 

5132.  Parcels   Post,   Freight,   and   Express,   Outward. 

5133.  Bad  Debts. 

5134.  Insurance. 

5135.  Taxes. 

5136.  Repairs. 

5137.  Depreciation  on   Sales  Department  Furniture  and  Furnishings. 


♦514.  Administrative  Expense. 

♦5141.  Salaries  and  Wages. 

51411.  Salaries  of  Officers. 

51412.  Salaries  of  Managers  and  Clerks. 

51413.  Directors'  Fees. 

51414.  Christmas  Presents  to  Staff. 

5142.  Stationery  and  Office  Supplies. 

5143.  Postage. 

5144.  Telephone  and  Telegraph. 

5145.  Filing  Department  Expense. 
♦5146.  Occupancy  Expense. 

51461.  Heat. 

51462.  Light. 

51463.  Depreciation  on  Office  Building  and  Fixtures. 

51464.  Depreciation  on  Furniture  and  Furnishings. 

51465.  Property  Taxes. 

51466.  Repairs. 

51467.  Insurance. 

51468.  Ice  Water. 

51469.  Towel  Service. 

5147.  Traveling  Expenses  of  Officers. 

5148.  Donations. 

5149.  Miscellaneous  General  Expenses. 


♦52.  Non-operating  expense. 

♦521.  Expenses  of  Sale  of  Fixed  Assets. 

5211.  Cost  of  Sale  of  Investment  Land. 

5212.  Cost  of  Sale  of  Branch  Factory. 

5213.  Cost  of  Sale  of  Auto  Trucks,  Type  C. 

♦522.  Expenses  of  Sale  of  Subsidiary  Commodities. 

5221.  Cost  of  Sale  of  Boiler  Room  Products. 

5222.  Cost  of  Sale  of  Waste  Paper. 

5223.  Cost  of  Sale  of  Kindling  Wood. 

♦523.  Investment  Expense. 

5231.  Taxes  on  Investment  Land. 
♦5232.  Cottage  Expense. 

52321.  Taxes  on  Cottages. 

52322.  Repairs  on  Cottages. 

52323.  Insurance  on  Cottages. 

52324.  Depreciation  on  Cottages. 


16 


*524.  Financial  Expense. 
*S241.  Interest  Paid. 

52411.  Interest  Paid  on  First  Mortgage  Bonds. 

52412.  Interest  Paid  on  Second  Mortgage  Bonds. 

52413.  Interest  Paid  on  Consolidated  Mortgage  Bonds. 
*52414.  Interest  Paid  on  Negotiable  Instruments. 

524141.  Interest  Paid  on  Trade  Acceptances. 

524142.  Interest  Paid  on  Notes. 

524143.  Interest  Paid  on  Officers'  Notes. 

524144.  Interest  Paid  on  Foreign  Bills  of  Exchange. 

5242.  Discount  on  Second  Mortgage  Bonds  Written  Off. 

5243.  Merchandise  Discount  on  Sales. 


*  No  accounts  should  be  opened  in  the  ledger  for  account  titles  marked  with  an 
asterisk,  unless  as  controlling  accounts  for  the  sub-accounts.  They  are  used  as  head- 
ings merely  for  the  purpose  of  detailed  classification.  , 

17 


PART  I 


PROBLEM  1 


(Adapted  from  Wisconsin,  1915) 

Classify  and  group  the  following  accounts  of  a  manufacturing  company- 
according  to  kind  of  asset,  liability,  proprietary  interest,  income  and  expense: 


1.  Accounts  Payable.  35. 

2.  Accounts    Receivable.  36. 

3.  Accrued  Interest  on  Bonds  Issued.  37. 

4.  Accrued  Salaries  and  Wages.  38. 

5.  Advertising.  39. 

6.  Bad  Debts  Written  Oflf.                    .  40. 

7.  Bills   Payable.  41. 

8.  Bills   Receivable.  42. 

9.  Bond   Discount  on   Bonds    Purchased.     43. 

10.  Bond  Premium  on  Bonds  Issued.  44. 

11.  Capital  Stock.  4.S. 

12.  Cash.  46. 

13.  Credit  Department  Expenses.  47. 

14.  Depreciation  of  Buildings,  Machinery  48. 

and  Plant.  49. 

15.  Depreciation  of  Workmen's   Cottages.     50. 

16.  Directors'  Fees.  51. 

17.  Discount  on  Purchases.  52. 

18.  Discount  on  Sales.  53. 

19.  Federal  Income  Tax. 

20.  First  Mortgage  Bonds.  54. 

21.  Freigh.  and  Cartage  Inward. 

22.  Freight  and  Cartage  Outward.  55. 

23.  General  Office  Expenses.  56. 

24.  Good  Will.  57. 

25.  Insurance.  58. 

26.  Insurance  Premiums  Unexpired.  59. 

27.  Interest  on  Bills  Payable.  60. 

28.  Interest  on  Bonds  Issued.  61. 

29.  Income  from  Investments.  62. 

30.  Inventory,  Raw  Materials.  63. 

31.  Inventory,  Goods  in  Process.  64. 

32.  Inventory,  Manufactured  Goods.  65. 

33.  Investments  (Outside).  66. 

34.  Maintenance  of  Buildings,   Machinery     67. 

and  Plant.  68. 


Maintenance  of  Workmen's  Cottages. 

Manufacturing  Power,  Heat  and   Light. 

Miscellaneous  Factory  Expenses. 

Miscellaneous  Selling  Expenses. 

Non-Productive  Labor. 

Office   Equipment. 

Office  Salaries. 

Officers'  Salaries  and  Expenses. 

Organization  Expenses. 

Patent  Rights. 

Patterns  and  Drawings. 

Plant  Site. 

Plant  Buildings. 

Plant  Machinery  and  Equipment. 

Productive  Labor. 

Purchasing  Department  Expense. 

Raw   Materials   Purchased. 

Rent  of  Workmen's  Cottages. 

Reserve   for    Depreciation    of   Buildings, 

Machinery  and  Plant. 
Reserve  for  Depreciation  of  Workmen's 

Cottages. 
Reserve  for  Doubtful  Accounts. 
Reserve  for  Sinking  Fund. 
Returns  and  Allowances,  Purchases. 
Returns   and   Allowances,   Sales. 
Sales  of  Manufactured  Goods. 
Sales  of  Waste  Materials. 
Sales  Agents'  Commissions. 
Salesmen's  Salaries. 
Salesmen's   Expenses. 
Sinking  Fund  Investments. 
Surplus. 

Taxes  on  Plant  and  Equipment. 
Taxes  Accrued. 
Workmen's  Cottages. 


Comment  (Problems  1,  2,  3,  4,  5).  The  solutions  to  these  problems  may  be  prepared 
by  writing  the  sub-class  heading  in  the  margin  and  listing  the  names  of  the  accounts 
falling  under  that  heading  in  an  indented  column  beneath;  i.e.: 

Current  Assets 
Cash. 

Notes  Receivable. 
Etc. 

As  an  aid  in  determining  the  classification  of  some  of  the  more  unusual  accounts, 
set  up  the  journal  entry  which  might  bring  the  account  on  the  books.  What  would-b« 
the  counterbalancing  debit  or  credit?  Does  the  account  represent  an  ani.ount  applicable 
to  more  than  one  period? 

Distinguish  between  surplus  reserves  and  liability  or.  valuation  reserves.   A  valuation 


18 


reserve  covers  a  loss  which  has  been  suffered  or  is  certain  to  be  suffered  though  the 
amount  may  be  uncertain. 

"Bad  Debts  Written  Off"  refers  to  losses  which  have  been  suffered  and  are  written 
off  the  books.  "Bad  Debts"  may  refer  to  losses  which  have  occurred  or  to  losses 
which  are  expected  to  occur  in  the  future.  The  interpretation  to  be  placed  on  the 
account  may  be  determined  by  reference  to  the  counter  balancing  account.  The 
counter  balancing  credit  is  either  "Reserve  for  Bad  Debts"  or  "Accounts  Receivable." 
If  the  former  account  is  used,  the  amount  is  an  estimate;  if  the  latter,  the  amount 
represents  a  realized  loss. 

"Sinking  Fund  Investments,"  for  purposes  of  these  problems,  may  be  treated  as  a 
fixed  asset  account.  Also  treat  "Workmen's  Cottages"  as  fixed  assets.  Under  some 
circumstances  both  accounts  might  be  current  assets. 

Whether  or  not  securities  are  held  for  purposes  of  control  determine  their  status 
as  fixed  or  current  assets. 


PROBLEM  2 


(Wisconsin,  May,  1919) 

Classify  the  accounts  properly  recording  the  following  items  according  to 
the  subdivision  of  assets,  liabilities,  proprietary  interest,  income  and  expenses, 
under  which  they  should  be  grouped : 


1.  Expenses  Advanced  Salesmen.  15. 

2.  Wages  Due  Workmen  and  Office  Staff.  16. 

3.  Organization  Expenses.  17. 

4.  Organization   Expenses  Written   Off. 

5.  Reserve  for  Depreciation  on  Buildings. 

6.  Reserve  for  Income  and  Excess  Profits 

Taxes.  18. 

7.  Property   Taxes.  19. 

8.  Income  and  Excess  Profits  Taxes.  20. 

9.  Sinking  Fund  for   Bond    Redemption. 

10.  Reserve   for   Sinking   Fund.  21. 

11.  Cash    Discount   on   Merchandise    Pur- 

chases. 22. 

12.  Cash  discounts  on  Merchandise  Sales.  23. 

13.  Interest  on  Invested  Capital.  24. 

14.  Dividends  Declared.  25. 


Dividends  Payable. 

Notes  Receivable  Discounted. 

Trade   Acceptances. 

(a)  Given. 

(b)  Received. 

(c)  Discounted. 
Premium  on  Bonds  Issued. 
Discount  on  Bonds  Purchased. 
Amortization  of  Premium  on  Bonds 

Issued. 
Amortization    of    Discount   on    Bonds 

Purchased. 
Returned  Sales. 

Wages  Paid  Workmen  and  Office  Staff. 
Maintenance  of  Workmen's  Cottages. 
Income  from  Stocks  and  Bonds  Owned. 


PROBLEM  3 


(Wisconsin,  November,  1919) 

Classify   and   group   the   following  accounts   according  to  kind   of   asset, 
liability,  proprietary  interest,  income  and  expense*. 


Interest  Collected  in  Advance. 

.Sinking  Fund. 

Notes  Receivable  Discounted. 

Treasury  Stock. 

Work  in  Progress, 

Dividends  Unclaimed. 

Capital  Stock  Subscription. 

Suspense  Accounts  Receivable. _ 

Discount  on  Bonds  Issued  Written  Off. 

Accrued  Property  Taxes. 

Accrued  Income  and  Excess  Profits  Taxes. 

'nterest  Accrued  on  Notes  Receivable. 

Interest  Accrued  on  Bonds  Payable. 

Reserve  for  Sinking  Fund. 

Reserve  for  Bad  Debts. 

Merchandise  Purchases. 

Sales'  Returns  Allowances. 

Reserve  for  Building  Extensions. 


Bonds  Payable. 

Interest  Earned  on  Liberty  Bonds. 

Interest  Paid  on  Liberty  Loan  Installments. 

Reserve  for  Depreciation,  Buildings. 

Dividends  Declared. 

Dividends  Payable. 

Investments  in  and  Advances  to  Companies 
for  Purposes  of  Control. 

Advances  to  Company  Officials. 

Insurance  Premiums  Paid  by  Company  or 
Life  of  its  President  (in  which  the  Com- 
pany is  Beneficiary). 

Installment  Payments  by  Employes  on  Lib- 
erty Bonds  Bought  for  Them  by  Com- 
pany. 

Liberty  Bonds  Bought  for  Employes. 

Employes'  Liberty  Bond  Subscription. 


19 


PROBLEM  4 


Classify  and  group  the  following  accounts  of  a  manufacturing  corporation 
according  to  kind  of  asset,  liability,  proprietary  interest,  income  and  expense : 


9. 

10. 
11. 
12. 
13. 

14. 

15. 
16. 

17. 
18. 

19. 
20. 
21. 
22. 

23. 

24. 
25. 
26. 
27. 
28. 

29. 
30. 
31. 

32. 
33. 
34. 

35. 

36. 
Z7. 
38. 


Trade  Marks  and  Patents. 

Merchandise   Discount  on  Sales. 

Real   Estate,   Factory   Site. 

Gross  Sales. 

Merchandise  Discount  on  Purchases. 

Cash  on  Hand. 

Interest  Paid  on  First  Mortgage  Bonds. 

Interest  on  Debenture  Bonds  Accrued 
but  Not  Due. 

Bank  Account. 

Interest  Received  from  Customers. 

Interest   Paid. 

Miscellaneous   Factory   Expenses. 

Reserve  for  Depreciation,  Factory  and 
Office  Buildings. 

Depreciation  Fund  for  Replacement  of 
Physical  Assets. 

Reserve  for  Bad   Debts. 

Sinking  Fund  for  First  Mortgage 
Bonds. 

Raw  Materials. 

Reserve  for  Depreciation  of  Power 
Plant. 

Finished  Goods  Inventory. 

Direct  Labor. 

Machinery  and  Tools. 

Reserve  for  Depreciation  of  Auto 
Trucks. 

Reserve  for  Depreciation  of  Machinery 
and  Tools. 

Amortization  of  Patents. 

Notes   T?eceivable. 

Real  Estate,  Investment. 

Sale  of  Investment  Land. 

Amortization  of  Discount  on  Deben- 
ture Bonds. 

Auto  Trucks. 

Factory  Materials  and  Supplies. 

Factory  Materials  and  Supplies,  In- 
ventory. 

Coal  Oil,  and  Waste,   Inventory. 

Coal.  Oil,  and  Waste. 

Repairs  to  Machinery. 

Reserve  for   Depreciation   of  Furni- 
ture and  Fixtures. 

Property  Taxes. 

Furniture  and  Fixtures. 

Enpfineers  and  Firemen,  Labor. 


39. 

40. 
41. 
42. 
43. 
44. 
45. 
46. 
47. 
48. 
49. 
50. 
51. 
52. 
53. 
54. 
55. 
56. 
57. 
58. 
59. 
60. 
61. 
62. 
63. 
64. 
65. 
66. 
67. 
68. 
69. 

70. 
71. 

72. 

yz. 

74. 
75. 
76. 

77. 


79. 

SO. 
81. 


Power   Plant. 

Factory  Superintendence. 

Factory  Insurance. 

Cash  Balance  in  Banks. 

Factory  and  Office  Buildings. 

Repairs  to  Factory   Buildings. 

Salesmen's  Salaries. 

Salesmen's  Salaries  Paid  in  Advance. 

Advertising. 

Shipping  Expenses. 

Salaries  of  Executive  Officers. 

Unexpired   Fire  Insurance. 

Accounts  Payable. 

Office  Salaries. 

Accrued  Taxes. 

Postage,  Telegrams,  and  Telephone. 

Capital  Stock,  Preferred. 

Stationery  and  Printing. 

Notes  and  Loans  Payable. 

Wages  Accrued  and  Unpaid. 

Capital  Stock,  Common. 

Goodwill. 

First  Mortgage  Bonds  Issued. 

Treasury  Stock. 

Donated  Surplus. 

Revaluation  Surplus. 

Free  Surplus. 

Notes  Receivable  Discounted. 

Bonuses  Paid  Workmen. 

Protested  Notes  Receivable. 

Premiums  Realized  on  Preferred  Stock 

Sales. 
Discount  on    Common   Stock  Sales. 
Premium   on   First  Mortgage   Bonds 

Issued. 
Life   Insurance    Premiums    Paid    on 

Life  of  President. 
Fire  Loss  on  Factory,  Not  Covered 

by  Insurance. 
Debenture  Bonds  Issued. 
Discount  on  Debenture  Bonds  Issued. 
Amortization    of  Premium   on   First 

Mortgage  Bonds  Issued. 
Reserve   for   Income   and    Excess 

Profits  Tax. 
Sales  Returns  and  Allowances. 
Accounts  Receivable. 
Bad   Debts. 
Depreciation. 


PROBLEM  5 

(Adapted  from  Institute  Examination,  November,  1917) 

Classify  and  group  the  following  accounts : 


Accounts  Payable- 
Accounts  Receivable. 
Accrued  Interest  on  Investments. 
Accrued  Interest  on  Mortgage  Payable 
Advertising. 
Buildings. 
Capital  Stock. 


Capital  Stock  Unsubscribed. 
Cash  on  Deposit. 
Commis-sions  Paid  Salesmen. 
Depreciation,  Buildings. 
Depreciation,  Machinery. 
Discount  Allowed  on  Sales. 
Discount  Received  on  Purchases. 


20 


Factory  Expenses. 

Factory  Payroll. 

Factory  Payroll  Accrued. 

Finished  Goods  Inventory. 

Freight  and  Cartage  Inward. 

Freight  and  Cartage  Outward. 

Fuel. 

Good-will. 

Insurance,  Buildings  and  Machinery. 

Insurance,  Finished  Goods. 

Interest  Paid. 

Interest  Received. 

Investments. 

Machinery. 

Mortgage  on  Plant. 

Notes  Payable. 

Notes  Receivable. 

Office  Expenses. 

Office  Furniture  and  Fixtures. 

Office  Salaries. 

Office  Salaries  Accrued. 

Organization  Expenses. 

Pettv  Cash. 


Prepaid   Taxes  on   Real   Estate. 

Profit  and  Loss. 

Raw  Material  Purchased. 

Raw  Material  Inventory. 

Real  Estate. 

Repairs,   Buildings. 

Repairs,  Machinery. 

Reserve  for  Bad  Debts. 

Reserve  for  Depreciation  on  Buildings. 

Reserve  for  Depreciation  on  Machinery. 

Returns  and  Allowances  on  Sales. 

Salaries — Executive  Officers. 

Salaries — Salesmen. 

Sales. 

Salesmen's  Accounts — Advances  on  Salaries. 

Subscriptions  and  Donations. 

Taxes — Income. 

Taxes — Real  Estate. 

Unexpired  Insurance,  Buildings  and 

Machinery. 
Unexpired  Insurance,  Finished  Goods. 
Work  in  Process  Inventory. 


PROBLEM  6 
(Wisconsin,  May,  1919) 

The  following  a.sset  accounts  appear  upon  the  books  of  the  Wisconsin 
State  Normal  Schools : 


Land. 

Land  Improvements. 

Structures  and  Attached  Fixtures. 

Machinery  and  Equipment. 

Educational  Apparatus. 


Furniture  and  Furnishings. 
Live  Stock  and  Poultry. 
Library  Books. 
Text  Books. 
Museum  Specimens. 


Indicate  the  account  or  accounts  to  which  each  of  the  following  items 
should  properly  be  charged : 

(a)  Canary  for  Kindergarten  Dept. 

(b)  Sidewalk. 

(c)  Office   Desk. 

(d)  Log  Chain. 

(e)  Tractor. 

(f)  Shrubbery. 

(g)  Piano  for  Music  Dept. 
Cream  Separator. 


(i)   Ford  Automobile. 

(j)   Cinders  for  Track. 

(k)  Test  Tubes. 

(1)   Copy  of  Wis.  Statutes. 

(m)  Adding  Machine. 

(n)   Cash  Register. 

(o)   School   Manual. 


(h) 

Comment. — In  this  problem  the  purpose  for  which  one  asset  is  used  is  the  deter- 
minant factor. 


PROBLEM  7 

(Wisconsin,  May,  1919) 

The  State  Fair  Division  of  the  Department  of  Agriculture  has  three  appro- 
priations as  follows : 

L     Operation — for  the  ordinary  ever  recurring  expenses  of  the  department. 

2.  Capital — for  the   acquisition   of  permanent  property,   such   as  lands, 
buildings,  equipment,  etc. 

3.  Maintenance — for  the  keeping  of  permanent  property  in  a  condition 
suitable  for  use  and  occupancy. 


21 


In  the  following  cases,  indicate  the  appropriation  to  be  charged  with  the 
expenditures  mentioned : 

(a)  A  new  team  is  purchased  to  replace  a  team  struck  by  lightning.  The  value  of 
the  old  and  new  team  is  the  same. 

(b)  Ticket  booth  for  War  Exhibit. 

(c)  Oil  for  roads  on  fairground. 

(d)  Bunting. 

(e)  Free  Exhibition. 

(f)  Special  Electric  Arches  for  Illuminating  Purposes. 

(g)  Sewer  Pipe. 

(h)   Flowers  and  Shrubs, 
(i)  Whitewash, 
(j)  Exhibit  Signs. 

Comment. — The  student  may  ask  himself  three  questions  in  connection  with  this 
problem: 

(1)  Did  the  expenditure  result  in  the  addition  of  a  comparatively  permanent  asset? 
If  so,  it  is  capital. 

(2)  Did  the  expenditure  tend  to  delay  the  decline  in  value  of  some  asset,  or  restore 
an  asset  to  original  value?     Such  expenditures  are  maintenance  charges. 

(3)  If  an  expenditure  has  neither  of  the  above  results  it  is  a  proper  charge  to 
operation. 

PROBLEM  8 

I.  (a)  State  whether  each  of  the  following  accounts  is  a  liability  account, 
a  valuation  account,  or  a  proprietary  interest  account : 

1.  Reserve  for  Depreciation. 

2.  Reserve  for  Extensions. 

3.  Reserve  for  Bad  Debts. 

4.  Reserve  for  Contingencies. 

5.  Reserve  for  Inventory  Adjustment. 

6.  Reserve  for  Sinking  Fund. 

(b)  Discuss  the  accuracy  of  the  terminology  employed  in  each  of  the  above  account 
names.     (Wisconsin,  1917.) 

II.  In  the  balance  sheet  of  a  company,  as  prepared  by  the  secretary,  you 
find  the  following  items  : 

Under  "Capital  Assets." 

(a)  Factory  real  estate,  buildings,  plant  and  machinery. 

(b)  Real  estate  held  for  investment. 

(c)  Investments  in  and  advances  to  another  company  for  purposes  of  control. 

(d)  Franchises  having  a  fixed  term. 
Under  "Current  Assets." 

(e)  Company's  treasury  stock  (carried  at  50  cents  on  the  dollar). 

(f)  Raw    material,     finished    product    and    inventory    of    office     supplies    and 
stationery. 

(g)  Advances  to  officials  of  the  company  (unsecured). 

(h)   Insurance  premiums  paid  by  the   company  on  a  policy  on  the  life  of  the 

company's  president,  in  which  the  company  is  beneficiary, 
(i)  Due  to  customers, 
(j)   Sinking  fund  investments, 
(k)  Unexpired  fire  insurance  premium. 
(1)  Cash  in  bank  and  on  hand. 
Discuss   the  correctness   or   otherwise   of  the   above   classification    of  items   under 
capital  and  current  assets,  giving  reasons  for  your  opinions,  and  criticising  the  items 
generally.     (Missouri,  1915.) 

Comment. — As  already  stated,  the  test  of  a  valuation  account  is  whether  it  represents 
provision  for  a  loss  which  has  occurred  or  is  sure  to  occur,  though  the  amount  may  be 
doubtful. 

Real  estate  held  for  investment  may  be  either  a  fixed  or  a  current  asset,  depending 
upon  the  ease  with  which  it  may  be  converted  into  cash. 

22 


PROBLEM  9 
(Wisconsin,  May,  1919) 

(a)  State  the  revenue  account  or  section  of  the  operating  (or  income) 
statement  in  which  each  of  the  following  items  would  be  placed  in  general 
accounting  practice. 

(b)  State  the  treatment  given  each  of  the  items  under  the  Revenue  Act 
of  1918,  i.  e.,  if  an  income  item  state  whether  it  is  to  be  included  in  calculating 
gross  income,  and  if  an  expense  item,  state  whether  it  is  allowable  as  a  deduc- 
tion. 

Note  :  The  examinee  must  first  decide  whether  each  item  mentioned  should 
be  included  in  an  operating  (or  income)  statement. 

1.  Contributions  to 

(a)  Relief  and  charitable  organizations. 

(b)  Hospitals. 

(c)  Political  campaign  fund. 

(d)  Fund  to  promote  certain  legislation. 

(e)  City  convention  fund. 

2.  Expenses  of  the  president  of  the  company  attending  the  national  and 
the  state  trade  conventions. 

3.  Loss  through  enforced  sale  of  Liberty  Bonds. 

4.  Expenses  incurred  in  advertising  Liberty  Bonds  and  War  Savings  Cer- 
tificates. 

5.  Taxes  and  assessments  as  follows  :  State  Income  Tax ;  Federal  Income 
and  Excess  Profits  Tax ;  Real  Property  Tax ;  Street  Paving  Assessment ; 
Street  Repaving  Assessment. 

6.  Insurance  premium  on  life  of  the  company's  president. 

7.  Loss  suffered  on  salvaged  property  in  excess  of  depreciation  reserve 
created  to  date. 

8.  Profit  on  goods  manufactured  on  order  and  held  for  future  shipment. 

9.  Interest  paid  on 

(a)  Bonds  outstanding. 

(b)  Bank  Loans. 

(c)  Liberty  Bond  Installments. 

(d)  Scrip  Dividends. 

10.  Profit  on  donation  of  treasury  stock  (par  value,  $10,000;  market 
value,  $5,000)  sold  within  the  year  for  $5,500. 

11.  Rent  of  factory  building  ($2,000  per  year)  paid  to  a  corporation  in 
which  your  client  owns  $10,000  of  the  $100,000  capital  stock. 

12.  Rent  for  $75  per  month  for  a  warehouse.  On  July  1,  1918,  the  com- 
pany purchased  the  warehouse  property  for  $6,000.  A  cash  payment  of 
$2,000  was  made,  and  the  company  was  to  pay  the  balance  at  the  rate  of  $75 
per  month. 

13.  Depreciation  which  the  corporation  figures  on  the  following  items 
at  the  stated  rates : 

(a)  Brick  factory  building,  6?^%. 

(b)  Brick  office  building,  5%. 

(c)  Machinery  Equipment,  12^^%. 

(d)  Automobile  Trucks,  33y3%. 

14.  A  premium  of  $2,000  received  from  the  sale  of  $100,000  of  the  cor- 
poration's bonds. 

15.  An  item  of  $2,000  for  the  replacement  of  a  portion  of  an  old  machine. 

23 


16.  An  item  of  $200  incurred  in  removing  a  discarded  machine  to  make 
room  for  a  new  machine. 

17.  Expenses  of  officials  paid  in  visiting  the  corporation's  properties  in 
Buenos  Aires. 

18.  Gifts  to  members  of  the  Board  of  Directors. 

19.  Salary  of  $10,000  to  the  vice-president  of  the  corporation. 

20.  Interest  on  invested  capital. 

Comment. — Only  part  A  of  this  problem  is  required  of  students  in  Theory  and 
Practice  of  Accounting.  The  remainder  of  the  problem  pre-supposes  a  knowledge  of 
the  Income  Tax  Regulations. 

PROBLEM  10 
(Missouri,  1913) 

Following  is  a  list  of  the  accounts  appearing  on  the  trial  balance  of  a 
Manufacturing  Company,  which  deals  in  finished  merchandise  purchased,  as 
well  as  in  its  own  products.  From  this  list,  and  without  using  figures,  draw 
up  plans  of  Financial  Statements  (Balance  Sheet,  Manufacturing  account. 
Trading  account.  Profit  and  Loss  account,  etc.),  in  the  form  which  you  think 
most  suitable: 

Accounts  Payable.  Sales  (own  products). 

Salaries,   Management.  Inventory  (own  products). 

Capital  Stock.  Inventory  (raw  materials). 

Notes  Receivable.  Inventory  (partly  manufactured  goods). 

Cash.  Inventory  (merchandise   purchased). 

Notes  Payable  (partly  secured  by  deed  of     Inventory  (repair  supplies). 

trust).  Undivided  Profits  (end  of  last  year). 

Salaries,  Office  and  Store.  Purchases  (merchandise). 

Real  Estate.  Sales  (merchandise  purchased). 

Fuel.  Rent,  Factory. 

Insurance  (Plant).  Rent,  Store  and  Office. 

Light.  Printing  and  Stationery. 

Freight  (on  Merchandise  Purchased).  Accounts  Receivable. 

Machinery  and  Tools.  Horse,  Wagon  and  Harness. 

Freight  (on  Raw  Material)..  Stable  Expense. 

Buildings.  Advertising. 

Purchases   (raw  materials).  Interest   Payable. 

Machinery  Repairs.  Depreciation — Buildings,    Machinery, 
Productive   Labor    (factory).  Wagons  and  Harness. 

Labor  (warehouse).  Sundry  Factory  Expenses. 

Office  Furniture.  Sundry  Office  Expenses. 

Reserve,  Uncollectible  Accounts.  Postage. 

Reserve  for  Depreciation.  Subscriptions  and  Donations. 

Insurance  (merchandise).  Discounts   on   Purchases    (merchandise). 

Uncollectible  Accounts.  Rents,  Income. 

Salesmen's  Expenses  and  Salaries.  Insurance  Paid  in  Advance,  Plant. 

Management  Salary,  Office.  Insurance  Paid  in  Advance,  Merchandise. 

Discounts  on  Sales  (own  product).  Management  Salary,  Factory. 

Comment. — In  this  problem  the  term  "financial  statements"  obviously  is  used  in  its 
broad  sense  to  include  both  the  financial  statement  (balance  sheet),  and  the  operating 
statement.  Although  the  Manufacturing  Account,  Trading  Accounts  and  the  Profit 
and  Loss  Account  are  called  for,  the  usual  operating  statement  may  be  compiled. 

An  easy  method  of  procedure  would  be  to  draw  up  a  skeleton  financial  statement 
and  operating  statement  showing  the  main  division  headings,  such  as  "current  assets." 
Then  dispose  of  the  items  in  the  order  in  which  they  appear  in  the  problem,  placing 
each  item  under  the  appropriate  heading  in  one  of  the  skeleton  statements. 

Another  method  of  procedure  would  be  to  go  through  the  list  of  accounts  and 
pick  out  all  items  belonging  to  each  subdivision  of  the  division  before  taking  up  the 
next.  In  this  case  all  current  assets  would  be  picked  out  and  grouped  together  first, 
then  fixed  assets,  etc. 

24 


PROBLEM  11 
(Adapted  from  Institute  Examination,  May,  1919) 

The  following  trial  balance  of  the  B.  C.  Cotton  Company  is  taken  from 
the  books  after  the  inventories  have  been  adjusted  and  the  deferred  charges 
posted.  The  accounts  are  ready  to  close  for  the  period.  The  consigned  goods 
account  has  been  inactive  for  six  months  and  will  continue  so  for  the  present. 

Trial  Balance— March  31,  1921 

Cash    $    116,247.19 

Accounts  Receivable 63,492.58 

Inventory:    March  31: 

Raw  Materials 113,860.99 

Goods  in  Process 31,464.02 

Finished  Goods 114,069.57 

Fuel 1,250.00 

Starch  . . .  •  • 800.00 

Factory  Supplies 1,300.00 

Consignments  14,438.42 

Liberty  Bonds 1,000.00 

Buildings  and  Machinery 341,378.14 

Reserve  for  Dep'n.,  Bldg.  and  Mach $       4,267.23 

Tenement   Buildings 20,000.00 

Prepaid  Taxes 208.96 

Unexpired  Insurance 660.41 

Prepaid  Interest 5,100.00 

Accounts  Payable '. 313.45 

Notes  Payable 225,000.00 

Capital  Stock 362,500.00 

Surplus 188,866.14 

Sales-Cloth  268,337.28 

Purchases 162,403.68 

Labor-Productive   33,862.99 

Light-Factory 132.72 

Royalties   50.00 

Oils 38.62 

Finishing   7,455.55 

Supplies  Used 1,276.06 

Starch  Used 800.00 

Fuel  Used 1,455.99 

Freight  Inward 1,353.99 

Dep'n.  on  Bldgs.  and  Machinery 4,267.23 

Insurance-Factory    350.00 

Taxes,  Factory 567.71 

Commissions    7,121.42 

Office  Salaries 3,000.00 

General   Expense 542.88 

Water-Tenements  202.24 

Tenements,  Repairs,  Insurance,  Taxes 1,610.99 

Interest   Paid 2,539.90 

Discount  Allowed 899.50 

Rent  from  Tenements 500.00 

Waste  Sales 1,401.39 

Discounts  Taken 4,016.26 


$1,055,201.75        $1,055,201.75 


25 


The  inventories  of  finished  goods  have  been  adjusted  through  the  cloth 
sales  account  and  inventories  of  goods  in  process  and  raw  materials  through 
the  purchases  account. 

Inventories  January  1,  1921 

Raw  Materials .$143,566.55 

Goods  in  Process 22,258.01 

Finished  Goods 132,833.85 

Prepare : 

(a)  Operating  Statement  for  the  quarter  ended  March  31,  1921.  Show  cost  of  goods 
made  and  sold. 

(b)  Financial  Statement  as  of  March  31,  1921. 

PROBLEM  12 
(Adapted  from  Michigan  Examination,  1908) 

The  following  figures  are  taken  from  the  books  of  the  Fairview  Manu- 
facturing Company  of  New  York  City,  on  the  31st  of  December,  1907: 

"^Inventory  of  Finished  Goods  (January  1) $    3,684.57  ^ 

v/  Inventory  of  Raw  Material  (January  1) 11,392.70  ^ 

,  Purchases  of  Raw  Materials 62,519.85  — 

V  Sales   . . . .  ■ 217,387.42  0 

V  Wages    109,317.88  - 

Rent 19,500.00  ^ 

"^ Discounts  Received  on  Purchases 375.60  C 

.  Discounts  Allowed  on  Sales 186.36  " 

^Power,  Light  and  Heat 8,710.64  -r 

^  Light  and  Heat  for  Office 168.00  — 

^     -  Repairs  1.090.00  -^ 

V  Packing •  ■ 2,017.00  - 

V  Factory  Expense 3,270.00  — 

General  Expense , 5,230.00 

-  Factory   Insurance . . .  •  • 1,050.00 

General  Insurance 750.00 

'  Machinery  and  Plant 12,350.00- 

-Tools 2,600.00 

"  Commissions   Paid 7,642.00 

,  Office   Salaries 9,700.00  - 

^  Salesmen's  Salaries 8,930.00 

V  Interest  on   Loans 440.00''^ 

vLoans  Payable 22,000.00  '^ 

Discount  Lost 120.00  - 

y  Notes   Receivable 130,000.00  ^ 

.  Notes  Rec.  Disc 8,000.00  Q 

HSTotes  Payable 19,500.00 

V  Accounts  Receivable 101,026.00  -- 

\y  Accounts  Payable 30,020.00  '' 

vOffice   Furniture 1,100.00  - 

^  Furniture  and   Fixtures 1,950.00  -" 

V  Cash  on  Hand 1,825.00^ 

•.  Cash  in  Banks 26,467.00  -^ 

V  Returned  Sales 276.00  r^ 

">  Capital 200,000.00  ^ 

V  Reserve  for  Depreciation 3,236.98  ^ 

-'Reserve  for  Bad  Debts 5,727.00  "• 

^Freight  and  Cartage,  Inward 727.00 

'Stable  Expenses 2,750.00 

^  Horses,  Wagons  and  Harnesses 8,500.00 

•  Postage  and  Express 1,250.00 

Superintendence 3,500.00 

-  Taxes    250.00 

'  Goodwill 10,000.00 

Stationery  and  Printing 1,080.00 

Advertising 8,630.00 

^Surplus  (1906) 63,753.00 O 

26 


You  are  requested  (a)  to  prepare  from  them  a  trial  balance,  arranging 
the  accounts  according  to  the  system  used  in  laboratory;  (b)  to  draft  journal 
entries  for  closing  the  books;  (c)  the  proper  revenue  accounts  in  statement 
form;  (d)  to  certify  your  results  by  a  balance  sheet,  the  items  of  which  are 
arranged  in  the  order  used  in  presenting  such  statements  to  bond  houses  for 
an  issue  of  mortgage  bonds. 

Notations :  The  following  items  are  to  be  taken  into  consideration  before 
preparing  the  statement  asked  for : 

Raw  Materials $  16,250.00 

Finished  Goods •  9,386.00 

Tools •  • 2,000.00 

Office   Furniture 1,000.00 

Furniture  and  Fixtures 1,500.00 

Stationery  and  Printing 300.00 

Allow  for  depreciation :  On  machinery  5  per  cent.  On  horses,  wagons 
and  harness  10  per  cent. 

Reserve  1  per  cent,  of  the  sales  for  bad  debts.  The  item  of  rent,  $19,500, 
is  to  be  apportioned  as  follows :  Fifty-three  per  cent,  for  factory,  2  per  cent, 
for  salesrooms,  and  25  per  cent,  for  office. 

The  item  of  superintendence,  $3,500,  is  to  be  divided  %  to  factory  and  % 
to  general  expense. 

Comment. — This  problem  may  be  solved  first  on  a  twelve  column  working  paper. 
The  columnar  headings  of  the  working  sheet  would  be  as  follows: 


Columns  1  and     2 

Columns  3  and     4 

Columns  5  and     6 

Columns  7  and     8 

Columns  9  and  10 

Columns  11  and  12 


Trial    Balance    debit   and    credit. 

Adjustments    debit    and    credit. 

Manufacturing  debit  and  credit. 

Trading  debit  and  credit. 

Administrative  and  Financial  debits  and  credits. 

Financial  statement,  debit  and  credit. 


The  Adjustment  columns  should  contain  both  a  debit  and  a  credit  for  each  notation. 
If  the  name  of  the  account  to  be  debited  or  credited  does  not  appear  on  the  trial 
balance,  il  should  be  written  below.  Debits  and  credits  for  items  transferred  from  one 
account  to  another  also  should  be  placed  in  the  adjustment  columns.  These  columns 
should  receive  all  entries  which  should  be  made  in  the  journal  prior  to  the  closing 
entries,  but  after  the  trial  balance  is  taken.  After  adjustments  are  entered,  the  amounts 
in  the  adjustment  columns  are  to  be  combined  with  the  appropriate  trial  balance  items 
to  arrive  at  the  amounts  to  be   entered  in  the  proper  columns  of  the  working  sheet. 

After  the  working  sheet  is  prepared,  it  is  comparatively  easy  to  take  ofi  the 
operating  statement  (columns  5  to  10  inclusive),  and  the  financial  statement  (columns 
11  and  12). 

Attention  is  called  to  the  fact  that  but  six  columns,  or  three  pairs  of  columns,  are 
used  for  the  operating  items.  Since  the  balance  of  each  pair  of  columns  can  show  but 
one  fact,  only  three  of  the  six  operating  results  usually  shown  on  statements  can  be 
designated  on  the  working  sheet.    The  six  operating  results  usually  shown  are: 

1.  Cost  of  goods  made. 

2.  Cost  of  goods  sold. 

3.  Gross  profit. 

4.  Trading  profit.    . 

5.  Operating  profit. 

6.  Net  profit. 

The  student  is  asked  to  show  the  second,  third,  and  sixth  of  the  above  named 
results  as  balances  of  the  three  pairs  of  operating  columns  of  the  working  sheet  above 
outlined. 

27 


PROBLEM  13 

(Ohio,  1916) 

At  the  close  of  its  fiscal  year,  December  31,  1915,  the  Trial  Balance  of 
The  Nau-Pace  Company  was  as  follows : 

Real  Estate  $  225,000.00 

Fixed    Machinery    150,000.00 

Movable    Equipment    18,000.00 

Shaftings,  Pulleys,  Etc 10,500.00 

Stable  Equipment   3,500.00 

Office   Equipment    2,915.90 

Drawings    and    Patterns 9,000.00 

Patents    75,000.00 

Capital    Stock    $   500,000.00 

First   Mortgage   Bonds 100,000.00 

Profit  and  Loss   

Surplus    86,140.28 

Dividends    300.00 

Interest   on    Bonds 5,000.00 

Other  Interest  Paid   1,323.10 

Interest  Received    2,469.50 

Cash  Discount  on  Purchases 13,389.52 

Cash    Discounts    on    Sales     2,861.50 

Sales    1,540,816.75 

Return  Sales 8,258.25 

Cash 27,750.65 

-      Bills    Receivable     50,750.00 

Accounts   Receivable    298,650.25 

Raw  Materials    622,190.90 

Finished  Goods,  January  1,  1915 62,735.06 

Goods  in  Process,  January  1,   1915 24,747.27 

Fuel   38,688.28 

Insurance    4,000.00 

Taxes   ; 5,000.00 

Bills   Payable    40,000.00 

Accounts  Payable   46,585.85 

Reserve  for  Depreciation: 

Machinery  and  Equipment 50,000.00 

Baildings    30,000.00 

Patents  22,058.80 

Bad  Accounts  6,240.75 

Salaries,  Officers  and  Clerks  (General) 56,150.00 

General  Office  Supplies    2,950.75 

Postage,  Telegraph  and  Phone 1,560.00 

Miscellaneous    General    Expenses 850.00 

Advertising    35,000.00 

Salaries  and  Expenses,  Salesmen 72,350.31 

Agents'    Commissions    30,141.40 

Credit  Department  Salaries    7,560.00 

Miscellaneous   Expenses,  Selling 610.00 

Stable  Expenses    3,963  46 

Direct  Labor  (Mfg.) 508,311.39 

Indirect  Labor  (Mfg.) 44,981.01 

Superintendence,    Factory    6,000.00 

Factory  Supplies   8^547.18 

Repairs,    Machinery   and    Equipment 7,418.52 

Repairs    of    Buildings     2,860.47 

Power,   Heat  and  Light 2,875.80 

$2,438,001.45        $2,438,001.45 

You  are  to  take  into  consideration  the  following-  facts : 
1.     Real  Estate,  Machinery  and  other  Factory  equipment,  and  Patents 
are  stated  at  cost. 

28 


2.  Of  the  Real  Estate  $25,000  is  for  Land  and  $200,000  is  for  Buildings. 

3.  All  Capital  Stock  authorized  has  been  issued  and  is  outstanding. 

4.  Allowances  for  depreciation  are : 

Machinery  and  Factory  Equipment $  15,000.00 

Building,  3%  on  cost 
Patents,  1   l-17th  of  cost 

5.  $15,000  is  to  be  set  aside  as  a  reserve  for  bad  accounts. 

6.  Ten  per  cent,  of  the  book  values  of  Stable  Equipment  and  Office 
Equipment,  and  %  of  the  book  value  of  Drawings  and  Patterns  are  to  be 
charged  off. 

7.  Inventories  at  the  close  of  the  fiscal  year  were : 

Raw  Materials   $  63,580.40 

Finished    Goods 58,864.56 

Goods  in  Process  27,024.52 

Fuel 4,823.43 

Factory   Supplies    1,525.00 

Office  Supplies 500.00 

Prepaid    Insurance     500.00 

8.  The  accruals  are  : 

Taxes $    7,000.00 

Direct  Labor    •  • 12,618.75 

Indirect   Labor    2,040.50 

Interest  on  Bonds 1,000.00 

Advertising    4,718.50 

9.  The  depreciation  on  Stable  Equipment  (see  item  6)  is  to  be  charged 
to  Stable  Expenses,  and  %  of  the  latter  is  apportioned  to  Manufacturing 
Expenses  and  %  to  Selling  Expenses. 

10.  The  cost  of  Fuel  used  is  to  be  charged  to  Power,  Heat  and  Light. 

11.  Maintenance  of  Real  Estate  is  to  be  charged  with  cost  of  repairs  to 
Buildings,  depreciation  on  Buildings,  20%  of  Taxes  for  the  year,  and  $1,000 
for  insurance.  The  total  cost  of  such  maintenance  is  to  be  shown  as  an  item 
of  manufacturing  expense  on  the  statement  of  Cost  of  Sales. 

12.  The  portion  of  Insurance  remaining  after  charging  Maintenance  of 
Real  Estate  is  to  be  allocated  to  manufacturing  expenses. 

13.  Thirty  per  cent,  of  the  Taxes  for  the  year  is  to  be  apportioned  to 
manufacturing  expenses  and  50%  is  to  be  charged  against  income. 

14.  Of  the  salaries  of  Officers  and  Clerks,  General.  $3,600  should  be 
apportioned  to  selling  expenses. 

15.  Amongst  the  Bills  Receivable  is  a  note  for  $5,000  pertaining  to  a 
previous  fiscal  year,  which  is  considered  to  be  worthless.  No  provision  was 
made  for  such  loss. 

16.  Regardless  of  theory,  cash  discount?  on  purchases  and  sales  are  to 
be  treated  as  pertaining  to  income. 

17.  On  the  10th  of  December,  1915,  a  dividend  of  10%  on  the  Capital 
Stock  was  declared  and  made  payable  on  January  10,  1916,  for  which  no 
entry  was  made  prior  to  taking  off  the  Trial  Balance. 

Given  the  foregoing  information,  you  are  asked  to  prepare  the  following 
statements  in  approved  form  for  the  information  of  your  clients : 

1.  Cost  of  Sales. 

2.  Profit  and  Loss,  having  (a)  the  gross  profit  and  the  per  cent,  of  same 
on  sales;  (b)  selling  expenses  and  per  cent,  of  same  on  gross  profits;  (c) 
general  expenses  and  the  percentage  that  such  expenses  bear  to  gross  profits ; 
and  (d)  the  net  profits  and  the  per  cent,  of  same  on  sales. 

3.  Balance  Sheet,  showing  the  Surplus  at  the  beginning  of  the  fiscal  year, 
and  the  amount  at  the  close  of  the  year. 

Comment. — Working   sheets   may   be   used   in   the   solution  of  this   problem  in   a 

29 


manner  similar  to  that  followed  in  problem  12.     Refer  to  the  comments  on  problem  12 
for  instructions  relative  to  columnar  headings  and  balances. 

The  statement  in  the  problem  that  fifty  per  cent  of  the  taxes  are  to  charged 
against  income  is  taken  to  mean  that  half  of  the  taxes  are  income  taxes,  and  therefore, 
not  chargeable  as  expenses. 

The   student   should   distinguish   between    dividends   declared   and   dividends   payable, 
as  the  latter  are  liabilities. 

After  the  working  sheet  is  completed,  the  operation  and  financial  statements  may 
be  taken  off  on  journal  paper. 

PROBLEM  14 

(Adapted  from  Ohio,  1919) 

The  Ohio  Manufacturing  Company  commenced  business  on  January  1, 
1921,  with  a  paid-in  capital  of  $100,000.00. 

The  transactions  for  the  year  1921  were  as  follows :  Purchases  on  credit : 
Land,  $5,000.00;  Buildings,  $20,000.00;  Machinery  and  Equipment,  $30,000.00; 
Raw  Material,  $100,000.00;  Factory  Supplies  and  Expenses,  $10,200.00;  and 
Office  Expenses,  $3,000.00. 

The  Cash  payments  for  the  year  included :  Factory  productive  labor, 
$40,000.00;  Factory  non-productive  labor,  $20,000.00;  Officers'  Salaries,  $10,- 
000.00;  other  Office  Salaries,  $8,000.00;  and  Salaries  and  Expenses  of  Sales- 
men, $10,000.00. 

Inventories  at  December  31,  1921,  were:  Raw  Material,  $20,000.00; 
Factory  Supplies,  $1,000.00;  and  Work  in  Process  amounting  to  $30,000.00; 
two-thirds  of  which  amount  was  for  materials  and  one-third  for  productive 
labor. 

The  open  Accounts  Receivable  amounted  to  $20,000.00,  after  charging 
ofif  $1,000.00  for  bad  debts,  and  the  Accounts  Payable  amounted  to  $18,200.00. 

The  units  completed  during  the  year  amounted  to  10,000,  of  which  8,000 
were  sold  at  $20.00  each. 

Provide  for  10%  depreciation  on  Machinery  and  3%  on  Building. 

You  are  required  to  prepare  an  Operating  Statement  and  a  Financial 
Statement  as  of  December  31,  1921, 

PROBLEM  15 

(Massachusetts,  1917) 
The  following  is  a  Trial  Balance  before  closing  of  the  second  year  on 
Tune  30,  1917 : 

DEBITS 

Treasury  Stock  (XTrustee) $      35,000.00 

Real   Estate    200,000.00 

Buildings   •  • 300,000.00 

Machinery  and  Equipment 150,000.00 

Materials  (Inventory,  June  30,  1916) 65,000.00 

Finished    Goods    do 158,000.00 

Accounts  Receivable 320,000.00 

Purchase  of  Materials 305,000  00 

Labor 132,800.00 

Operating  Expenses,  Repairs,  etc 121,500.00 

Sinking  Fund  Trustee 25,000.00 

Discount  on  Donated  Stock  sold  from  Treasury  by  Trustee..  25,000  00 

Cash 74,837.50 

Discount  on   Bonds   sold  July   1,   1915 25,000.00 

.    ■     Bond    Interest 12',50o!oO 

General  Expenses ]  7,500.00 

Insurance  Unexpired  June  30,  1916 3!oOo!oO 

$1,970,137.50 
SO 


CREDITS 

Capital   Stock  Issued $  500,000.00 

1st  Mortgage  5%  Bonds 250,000.00 

Accounts  Payable  40,000.00 

Reserve  for  Sinking  Fund  (Bonds) 25,000.00 

Premium  on  Capital  Stock 50,000.00 

Sales  of  Finished  Goods  (Net) 915,000.00 

Surplus  on  Donated  Stock 60,000.00 

Reserve  for  Depreciation  of  Buildings  .  .  .  ■. •  • 6,000.00 

Reserve  for  Depreciation  on  Machinery  and  Equipment 11,362.50 

Reserve  for  Bad  Debts  (Balance)   650.00 

Reserve  for  Replacements 15,000.00 

Bond  Interest  Accrued    3,125.00 

Taxes  Accrued   ■  ■ 9,000.00 

Unappropriated  Surplus  June  30,  1916 85,000.00 

$1,970,137.50 

You  are  required  to  adjust  the  accounts,  and  prepare  (a)  Certified  Balance 
Sheet;  (b)  Profit  and  Loss  Account  for  the  year;  (c)  Surplus  Account. 

The  following  information  is  given : 

Inventory  June  30,  1917,  Materials $  52,000.00 

Goods  in  Process  at  Cost 105,000.00 

Finished  Goods  at  Cost 137,000.00 

1.  Bonds  mature  in  10  years  from  July  1,  1915,  the  interest  being  pay- 
able in  April  and  October  of  each  year.    Bonds  were  sold  at  90. 

2.  Depreciation  on  Buildings  is  estimated  to  be  2  per  cent,  annually. 

3.  Depreciation  on  Machinery  and  Equipment  is  estimated  at  7^  per 
cent,  yearly. 

4.  A  Reserve  for  Bad  and  Doubtful  Debts  was  set  up  on  June  30,  1915, 
to  the  amount  of  $3,000,  against  which  the  bad  debts  written  ofif  during  the 
fiscal  year  were  charged.  Create  a  Reserve  for  the  coming  year  of  1  per  cent, 
on  Accounts  Receivable. 

5.  According  to  the  Company's  By-Laws  all  replacements  are  to  be 
made  from  Revenue.  During  the  year  a  machine  value  at  $6,000  was  re- 
moved and  replaced  by  a  similar  machine  costing  $10,000,  which  sum  was 
charged  to  "Operating  Expense  Repairs,  etc."  The  discarded  machine  was 
afterwards  sold  for  $1,500  and  this  sum  was  credited  to  Machinery  Account. 

6.  The  Trustee  of  the  Sinking  Fund  Investments  reports  that  he  received 
j^r),250  of  income  during  the  year.  He  is  to  be  paid  the  amount  iii  cash 
which  is  credited  to  the  Sinking  Fund  Reserve. 

7.  The  Insurance  was  paid  on  July  1,  1915,  for  a  period  of  three  years. 

8.  Taxes  were  charged  as  $3,(XX)  monthly  to  "Operating  Expenses"  and 
"Taxes  Accrued"  credited  therewith.  The  Taxes  paid  during  the  year  were 
$27,000.    The  tax  year  ends  March  31. 

9.  The  Treasury  Stock  was  donated  and  has  been  all  sold.  Dividend 
of  10  per  cent,  declared  on  June  30,  payable  July  15,  1917. 

Comment. — The  student  is  again  referred  to  problem  12  for  points  relative  to  the 
use  of  the  twelve  column  workmg  sheet. 

Attention  is  also  called  to  the  following  points: 

1.  The  trial  balance  is  for  the  close  of  the  second  year's  business.  Keep  this  fact 
in  mind  when  dealing  with  the  bond  discount. 

2.  Adjustments  for  note  5  must  be  made  before  computing  depreciation. 

3.  Interest  earned  by  a  sinking  fund  is  financial  income  of  the  corporation  even 
though  the  amount  necessary  to  be  paid  into  the  sinking  fund  is  not  reduced  by-that 
amount. 

4.  It  is  assumed  that  accrued  taxes  represent  $3,000.(X)  per  month  for  April,  May, 
and  June  and  that  an  adjustment  was  made  on  March  31. 

5.  The  account,  "Treasury  Stock  (X  Trustee)"  must  represent  the  cash  proceeds  of 
the  sale  of  the  treasury  stock,  because  the  problem  states  that  the  stock  has  all  been 
sold.  Consider  this  in  connection  with  the  discount  on  treasury  stock  sold  amounting 
to  $25,000.00. 

31 


PROBLEM  16 

(Adapted  from  English  Final  Examination,  May,  1912) 

A,  B  and  C  carry  on  business  in  partnership  as  gas  engine  dealers  and 
repairers,  their  business  being  divided  into  two  parts:  (1)  Engine  Depart- 
ment, (2)  Repair  Department.  The  following  were  the  Ledger  Balance  on 
31st  of  December,  1910: 

Engines — Purchases  and  Freight $  40,000.00 

Fitters,  Wages  and  Expenses 7,500.00 

Stocks,  12/31/09 10,000.00 

Sales 60,000.00 

Repairs— Purchases 25,000.00 

Stock,  12/31/09 4,000.00 

Wages  and  Expenses 10,000.00 

Sales 50,000.00 

Accounts  Receivable 20,000.00 

Accounts  Payable 11,200.00 

Salaries 2,500.00 

Rent  and  Taxes 1,500.00 

Fuel  and  Light •  ■ 250.00 

Insurance — Fire  and  Workmen's  Compensation 700.00 

Life  Policy— Surrender  Value,  12/31/09 1,500.00 

Life  Insurance  Premium 175.00 

Bank  Interest  and  Commission  (Dr.) •  • 100.00 

Office  Expenses   600.00 

Discount  (Dr.) 1,250.00 

Office  Furniture 750.00 

A,  Drawing  Account  (Dr.) 500.00 

B,  "  "         (Dr.) 600.00 

C,  "  "         (Cr.) 1,000.00 

C,  Loan  Account  (at  5  per  cent) 2,500.00 

A,  Capital  Account '. 2,500.00 

B,  "                "       2,500.00 

C,  "                " 2,500.00 

Cash  in  Hand 125.00 

Cash  at  Bank 5,150.00 

Stocks,  31st  December,  1910:  Engines •  • 10,500.00 

Repairs ■  • 4,750.00 

Surrender  value  of  life  policy  31st  of  December,  1910,  $1,625.  Interest  on 
capitaj  at  5  per  cent,  per  annum.  The  profits  were  divided :  A  7/20,  B  6/20, 
C  7/20. 

Make  out  a  trading  account  for  each  of  the  two  departments,  and  the 
firm's  profit  and  loss  account  for  1910.  and  balance  sheet  as  on  31st  of  Decem- 
ber, 1910. 

Comment. — The  following  revenue  accounts  should  be  used  in  the  solution  of  thij 
problem:  Repair  Trading,  Engine  Trading,  Administration  and  Appropriation.  Any 
items  belonging  definitely  to  either  trading  account  should  be  placed  accordingly. 
General  items  or  amounts  concerning  which  the  information  is  too  limited  to  determine 
the  correct  treatment,  should  be  placed  in  the  Administration  account. 

The  increase  in  the  surrender  value  of  the  insurance  policy  should  be  capitalized. 

PROBLEM  17 
(Adapted  from  English  Final  Examination,  November,  1910) 

On  December  31,  1909,  the  Trial  Balance  of  the  Jones  Garage  Company 
was  as  follows : 

300  Shares  Common  Stock,  $100  each $  30,000.00 

Good  Will  $  12,750.00 

Garage 7,500.00 

32 


Machinery  and  Tools 500.00 

Fixtures  and  Fittings   100.00 

Taxicabs 2,500.00 

Sundry  Debtors  12,500.00 

Stock  of  Accessories,  December  31,  1909 1,250.00 

Cash  at  Bank 5,275.00 

Sundry  Creditors •• 765.00 

Reserve  for  Bad  Debts,  December  31,  1908 400.00 

Accessories,  including  Tires  and  Tubes  (used)....      10,000.00 

Gasoline,  Oil,  etc.  (used) -.       2,750.00 

Cost  of  Repairing  Cars  (Wages  and  Materials) ....       3,750.00 

Charges  to  Customers  for  Repairing  Cars 4,0(X).(X) 

Expense  of  Taxicabs 1,000.00 

Wages 600.00 

Sales  of  Accessories,  including  Tires  and  Tubes...  13,250.00 

Cars  Purchased  for  Re-sale 55,000.00 

Sales  of  Gasoline,  Oil,  etc ■  • 3,750.00 

Sundry  Receipts  (Washing  Cars.  Charging  Batter- 
ies, etc.)    425.00 

Car  Sales   •  • 60,000.00 

Management  Expense  2,250.00 

Garage  Rents   •  • 225.00 

Repairs,  Paint,  etc 90.00 

Bad  Debts  Written  Oflf 250.00 

Freight  on  Cars  Sold 400.00 

Surplus 4,000.00 

Charges  to  Customers  for  Taxicabs 1,650.00 

$118,465.00        $118,465.00 

Depreciation  is  to  be  written  off  on :  Machinery  and  Tools  at  the  rate 
of  20  per  cent.,  Fixtures  and  Fittings  10  per  cent.,  Taxicabs  25  per  cent. 

Reserve  2  per  cent,  of  total  sales  for  bad  debts. 

Prepare  complete  accounts  in  the  form  which,  in  your  opinion,  is  calcu- 
lated to  give  the  greatest  amount  of  information  to  the  Directors  as  to  the 
working  results  of  the  business  at  a  glance. 

Comment. — Use  the  following  revenue  accounts  in  the  solution  of  this  problem: 
Repair  Shop  Trading. 
Accessory  Trading. 
Taxi  Service  Trading 
Car  Sales  Trading. 
Miscellaneous  Income. 
Administration  Expenses. 

Indefinite  items  of  income  and  expense  may  be  entered  in  the  Miscellaneous  Income 
Account  and  Administrative  Expense  Account  respectively. 

PROBLEM  18 
(Wisconsin,  1916) 

a.  What  is  the  amount  of  the  net  working  capital  in  the  following 
balance  sheet? 

Balance  Sheet  January  1,  1915 

Real  Estate  $  10,000.00           Capital  Stock  $  50,000.0(t 

Patents 8,000.00           Bonds 20,000.00 

Buildings 55,260.00            Notes  Payable 10,000.00 

Cash 9,320.00            Reserve  for  Bad  Debts 5,350.00 

Inventories  . 32,600.00           Accounts  Payable 32,502.00 

Interest  Prepaid   1,600.00  Reserve     for     Depreciation, 

Accounts  Receivable   40,200.00                Buildings 20,000.00 

Surplus 19,128.00 


$156,980.00  $156,980.00 

33 


b.     What  is  the  amount  of  the  net  working  capital  in  the  balance  sheet 
of  the  same  company  as  of  January  1,  1916,  which  here  follows? 


Balance  Sheet  January  1,  1916 


Real  Estate $  17,000.00 

Patents 7,000.00 

Buildings 68,520.00 

Cash 3,260.00 

Inventories 38,710.00 

Interest  Prepaid  820.00 

Accounts  Receivable 42,200.00 


$177,510.00 


Capital  Stock  $  50,000.00 

Bonds 30,000.00 

Notes  Payable 20,000.00 

Reserve  for  Bad  Debts 6,240.00 

Accounts  Payable 25,620.00 

Reserve     for     Depreciation, 

Buildings 35,200.00 

Surplus 10,450.00 


$177,510.00 


Profits  as  per  Profit  and  Loss  account  for  the  year  amounted  to  $6,322.00 
and  a  30  per  cent,  dividend  was  declared  and  paid. 

c.  Submit  a  statement  accounting  for  the  increase  or  decrease  in  the 
working  capital. 

Comment. — For  the  purposes  of  this  problem  do  not  include  prepaid  expenses  as 
working  capital.  Also  distinguish  betvi^een  reserves  which  apply  to  current  assets  and 
those  which  apply  to  fixed  assets.  Prepare  a  comparative  balance  sheet  showing  in- 
creases and  decreases  of  current  assets  and  current  liabilities. 


PROBLEM  19 
From  the  data  given  in  the  following  financial  statement  state : 

a.  The  working  capital. 

b.  Tic  net  working  capital. 

c.  The  value  of  the  net  current  assets  per  share  of  stock. 

d.  The  value  of  net  tangible  assets  per  share  of  stock. 

Assets 

Current    Assets $  40,000.00 

Fixed  Assets '. 40,000.00 

Intangible  Assets 15,000-00 

Accrued    Assets 2,000.00 

Deferred    Expenses 3,000.00 

Total    Assets $100,000.00 

Liabilities 

Current  Liabilities $  10,000.00 

Accrued  Liabilities 5,000.00 

Funded   Liabilities 20,000.00 

Deferred    Income 5,000.00 

Total   Liabilities 40,000.00 

Proprietary  Interest 

Capital  Stock  (500  shares) $     50,000.00   • 

Surplus 10,000.00 

Total  Proprietary  Interest $  60,000.00 


84 


PROBLEM  20 
(Pennsylvania,  1900) 

Which  of  the  following  corporations  is  the  stronger  financially?     Show 
how  and  why. 

RUTHLESS  IRON  COMPANY 

Cash    $  381,845.32 

Real  Estate,  Buildings,  etc 1,204,123.98 

Bills  Receivable   84,843.08 

Accounts    Receivable 1,154,111.35 

Good  Will,  Trade  Marks,  Patents 5,000,000.00 

Bonds  on  Hand   5,026.67 

Taxes  and  Insurance 5,730.87 

Lost  Creek  Railroad  Stock 8,245.36 

Company  Capital  Stock,  Title 650.00 

Inventory — Materials,    Supplies    1,664,113.28 

Machinery,   Tools,    Patterns,    Office   and    Shop    Furniture   and 

Fixtures  2,286,158.30 

Total  Assets   $11,794,848.21 

Liabilities 

Accounts   Payable    •  ■ $  545,039.55 

Preferred    Stock    5,000,000.00 

Surplus    204,302.88 

Contingency 49,432.34 

Common  Stock    5,000.000.00 

Loss  and  Gain 996,073.44 

Total   Liabilities    $1 1,794,848.21 


ENDLESS  CHAIN  COMPANY 

Cash    $181,845.32 

Bills    Receivable    84,843.08    $  266,688.40 

Accounts    Receivable    954,111.35 

Bonds  (Investment)   15,026.67 

Atlantic  City  R.  R.  Stock 18,245.36 

Other  Company  Stock 11,650.00 

Machinery  and  Patterns   2,255,158.30 

Real  Estate  and  Buildings 1,104,123.98 

Good  Will  and  Patents    5,000,000.00 

Taxes  and  Insurance 15,730.87 

Inventory — Materials,  Supplies   1,774,113.28 

Total $1  Ml  4,848.21 

Liabilities 

Capital  Stock $10,000,000.00 

Accounts  Payable  ' 1,090,079.10 

Surplus 59,263.46 

Profit  and  Loss   226,073.44 

Contingency  •  • 39,432.21 

Total $11,414,848.21 

Comment. — Some   of  the  points  for  analysis  and   comparison   in  this  problem  are: 

1.  Net  current  assets 

2.  Proportion   of  intangible   assets 

3.  Investment  bonds  as  compared  with  stock 

35 


PROBLEM  21 
(North  Carolina,  1919) 

What  is  the  book  value  of  a  share  of  stock  of  a  corporation,  the  balance 
sheet  of  which  is  as  follows?  (Arrange  the  balance  sheet  so  as  to  show  the 
book  value  of  its  net  assets,  and  state  the  book  value  of  a  share  of  its  stock.) 

ASSCTS 

Cash  on  Hand $  35,687.85 

Accounts   Receivable    25,972.42 

Stocks  Owned  at  Cost 72,000.00 

Inventories   at   Cost 49,889.22 

Deferred  Charges  to  P.  &  L 527.19 

Liberty   Bonds    20,000.00 

Value  of  Good  Will  (set  up) 50,000.00 

Notes  Receivable  5,000.00 

Treasury    Stock    30,000.00 

Cost    of    Plant 780,398.32 

$1,069,475.00 

LIABILITIES 

Capital  Stock   (3,000  shares) $  300,000.00 

Surplus 100,000.00 

Undivided    Profits     165,000.00 

Bonds    Outstanding    200,000.00 

Reserve  for  Depreciation   75,000.00 

Reserve  for  Additions  and  Improvements  to  Plant 50,000.00 

Reserve  for  Shrinkage   of   Inventory   Values 5,000.00 

Reserve  for  Dividends 15,000.00 

Reserve  for  Doubtful    Accounts    2,000.00 

Reserve  for  Extinguishment    of    Bonds 50,000.00 

Reserve  for  Estimated  Federal   Income  Taxes 15,000.00 

Accounts    Payable    31,000.00 

Notes  Payable    60,000.00 

Accruals    1,475.00 

$1,069,475.00 
Comment. — For  the  purposes  of  this  problem  eliminate  goodwill  from  the  assets. 
Distinguish  between  valuation  accounts  and  true  reserves.     The  reserve  for  shrinkage 
in  inventory  values  might  be  either  a  surplus  reserve  or  a  valuation  account,  but  here 
treat  it  as  a  valuation  account. 


PROBLEM  22 
(Adapted  from  Maine,  1917) 

From  the  .following  trial  balance,  you  are  asked  to  prepare  the  operating 
statement  and  the  financial  statement  of  the  B  Company. 

What  is  the  book  value  of  a  share  of  common  stock  on  December  31,  1920? 

TRIAL  BALANCE,  DECEMBER  31,  1920 

Inventory    $  4,328.91 

Purchases    13,852.33 

Wages 9,499.19 

Factory    Expense 242  11 

Sales   ..                     ■        $15,794.79 

Discount  on  Purchases 417  41 

Discount  on  Sales I95  34 

Re"t      ■A-^-- 300.00 

General  Oflfice  Expense 312.87 

36 


Cartage  on  Deliveries 166.09 

Insurance 354.54 

Commission,  Sales  Expense 45.00 

General  Salaries    3,031.49 

Cash 19.91 

Bank   2,651.73 

Accounts  Receivable 7,578.26 

Deposits  on  Contracts 500.00 

Notes    Receivable 4,408.13 

Show  Room  Stock 1,812.50 

Plant- 
Machinery  $  4,399.78 

Tools 2,325.66 

Drawings     311.55 

Models 2,107.55 

Office  Furniture  and  Fixtures 759.29 

59,202.34 
Factory  Alterations  and  Improvements....  852.59 

Notes  'Payable   $14,550.00 

Capital  Stock,  authorized 25,000.00 

Capital   Stock,  unissued 10,000.00  15,000.00 

Surplus   14,292.73 

$60,054.93    $60,054.93 
The  inventory  December  31,  1920  is: 

Material $  1,266.00 

Orders  in  Process  15,369.00 

$16,635.00 

Depreciation,  Machinery  and  Tools  10%  ;  Office  Furniture  and  Fixtures 
10%.  Reserve  1%  of  Sales  for  Bad  Debts.  The  drawings  and  models  repre- 
sent two  years'  outlay,  all  of  which  are  carried  as  assets,  but  they  have  no 
realizable  value.  Factory  alterations  and  improvements  are  to  be  spread  over 
a  period  of  ten  years  represented  by  the  lease  of  the  factory.  Divide  General 
Salaries  equally  between  Sales  Expense  and  Administration. 

PROBLEM  23 

I.  Considering  all  the  following  items  as  cash  in  drawer,  the  cash  count 
on  January  5,  1917,  agrees  with  the  cash  book  balance.  What  comment  would 
you  make  in  your  report  relative  to  each  item  ? 

(a)  A  check  signed  by  John  Jones,  payable  to  the  cashier,  dated  June  1,  1916. 

(b)  A  slip  with  the  following  *  notation:  "John  Smith,  janitor,  January  wages 
advanced  $22.00."     (Signed)  John  Smith.     The  janitor's  salary  is  $80.00  per  month. 

(c)  A  check  payable  to  cash  signed  by  the  cashier,  $10.00. 

(d)  A  receipted  express  bill  of  $5.87. 

(e)  A  slip  of  paper  with  the  notation  "Postage  stamps — $25.00." 

({)      A  certificate  of  deposit  made  out  in  favor  of  the  cashier  for  $400. 

(g)  A  bill  against  a  customer  for  $19.80  on  which  there  appears  the  notation  "will 
pay  on  the  31st."  You  find  that  the  customer  has  been  given  credit  for  the  payment  of 
this  invoice  on  the  ledger. 

(h)  A  slip  of  paper  with  the  following  notation — "I.  O.  U.  $10.  John  Doe." 
(Washington,  1917.) 

II.  In  auditing  the  cash  of  a  certain  company  as  at  January  1,  1918,  you 
find  that  the  cash  drawer  balance,  which  is  reported  as  $200.00,  consists  of  the 
following  items : 

(a)  Currency  and  Coin $122.50 

(b)  Postage  Stamps  (received  from  customers  in  payment  of  small  balances 

and  cashed  from  drawer) 17.50 

(c)  A  Slip  Inscribed  "I.  O.  U.  $20.00,  J.  B.  S." 20.00 

37 


(d)  Check  Payable  to  "Cash,"  signed  by  the  cashier  and  dated  August  2, 

1917. 28.00 

(e)  A  Slip  Inscribed  "Butter  and  Eggs  for  Mr.  Steele"  (the  General  Man- 

ager)           3.00 

(f)  A  Receipted  Express  Bill  for  charges  on  a  motor  received  from  The 

Electric  Co.     You  are  informed  that  this  motor  should  have  been 

sent  prepaid 9.00 

Total $200.00 

In  preparing  your  balance  sheet,  what  amount  would  you  enter  as  cash  on 
hand  and  what  disposition  would  you  make  of  items  not  included  therein? 

(Ohio,  1918.) 

Comment. — The  test  of  cash  items  is  the  ease  with  which  they  are  converted  into 
cash.     A  certificate  of  deposit  not  endorsed  to  the  company  or  business  is  questionable. 

PROBLEM  24 
(Wisconsin,  1918) 

(a)  Define  a  trade  acceptance  and  summarize  its  advantages  to 

1.  The  seller. 

2.  The  buyer. 

(b)  Under  what  account  or  accounts  should  be  recorded 

1.  Trade  acceptances  received. 

2.  Trade  acceptances  given. 

3.  Trade  acceptances  discounted. 

(c)  Would  you  advise  a  client  to  accept  a  trade  acceptance  for  a  renewal 
of  one  unpaid  at  maturity? 

(d)  May  a  partial  payment  be  made  upon  a  trade  acceptance?  If  so, 
what  would  be  the  entry  to  record  it? 

(e)  Does  the  rule  prohibiting  banks  from  loaning  more  than  10  per  cent. 
of  their  capital  and  surplus  to  any  one  borrower  apply  to  trade  acceptances? 

PROBLEM  25 
(Wisconsin,  1918) 

(a)  Previous  to  examining  the  accounts  of  a  corporation  at  the  end  of 
its  first  fiscal. year  you  find  that  Notes  Receivable  stands  in  the  financial 
statement  prep?.red  for  the  banker  at  $5,500. 

Upon  investigation  it  is  disclosed  that  $20,000  of  notes  from  customers 
were  received  during  the  period,  and  that  $10,000  of  these  notes  were  duly 
paid  in  full  by  the  customers  to  the  company  at  maturity,  and  $5,000  of  the 
notes  were  discounted  at  the  bank.  Of  the  notes  discounted,  a  note  for  $500 
given  by  Brown  &  Company  was  not  paid  when  due,  and  has  been  charged 
back  to  the  Notes  Receivable  Account.  Notes  to  the  amount  of  $1,500  are 
not  yet  due  at  the  bank. 

Partial  payments  have  been  made  to  the  company  to  the  extent  of  $500  on 
notes  still  due  and  these  payments  have  been  credited  to  an  account  called 
Partial  Payments  on  Notes  Receivable.  The  item  is  listed  in  the  financial 
statement  as  a  liability. 

A  customer's  note  of  $1,000  is  found  to  have  been  given  as  collateral  for 
the  payment  of  a  note  of  the  company  discounted  at  the  bank. 

A  30  day  note  given  by  an  officer  of  the  company  for  $200  is  treated  as  a 
cash  item.    The  note  is  60  days  past  due. 

You   are  asked  to   give   the  journal   entry   or   entries   for  obtaining  the 

3-^ 


proper  account  or  accounts  to  record  the  above  facts,  and  to  give  such 
comments  as  you  would  consider  appropriate  to  include  in  your  report  relative 
to  these  items. 

Comment. — The  principal  pofnts  to  this  problem  are  the  proper  accounting  for 
liabilities  incident  to  notes  receivable  discounted  and  partial  payments  on  notes.  An 
additional  account  is  n-ecessary  for  the  former. 


PROBLEM  26 
(Wisconsin,  1918) 

In  examining  the  accounts  of  a  corporation  you  find  that  the  Accounts 
Receivable  were  stated  as  $216,100.00  in  a  financial  statement  already  prepared 
by  the  company's  bookkeeper  and  handed  to  a  banker.  Upon  examining  the 
accounts  you  find  that  this  amount  is  made  up  of  the  following  items : 

Trade  Accounts  Receivable $175,000.00 

Advances  on  Merchandise  Purchased 5,000.00 

Cash  Advanced  to  Officers 10,000.00 

Unpaid  Subscriptions  to  Capital  Stock 8,500.00 

Advances  to  Traveling  Salesmen  for  Expenses 350.00 

Consignees'  Accounts    (full   selling   price  of  goods  shipped   on   consignment, 

credited  to  sa:es)  7,500.00 

Claims  against  Railroad  and  Express  Companies 1,750.00 

1  nvestments  in  Other  Companies 8,000.00 

Although  the  controlling  account  with  Accounts  Receivable  stand  debited 
with  $175,000  in  the  general  ledger,  you  learn  that  the  sum  of  the  individual 
debit  balances  in  the  sales  ledger  is  $190,000,  and  that  the  sum  of  the  individ- 
ual credit  balances  in  the  sales  ledger  amounts  to  $15,000.00. 

(a)  You  are  asked  to  criticize  the  treatment  of  these  items,  stating  such 
adjustments  as  it  would  be  advisable  to  make  in  preparing  the  operating 
and  financial  statements,  and  to  show  exactly  how  the  several  items  should 
appear  in  the  financial  statement. 

(b)  Would  you  recommend  that  a  corrected  copy  of  the  financial  state- 
ment be  given  the  banker? 

(c)  Assume  that  upon  further  investigation  you  discovered  that  the 
company  had  not  charged  off  any  accounts  as  bad  debts  during  the  six  years 
that  it  has  been  in  business,  and  that  no  provision  has  been  made  for  absorb- 
ing such  losses  through  a  Reserve  for  Bad  Debts  account. 

,  Outline  procedure  for  verifying  the  accuracy  of  the  accounts,  and  for 
classifying  them  according  to  the  possibility  of  collection.  Give  such  a  state- 
ment as  you  would  include  in  your  certificate  to  cover  this  condition  of 
affairs. 

Comment. — This  problem  illustrates  the  necessity  of  keeping  Trade  Accounts  Re- 
ceivable distinct  from  all  other  receivables.  It  is  desirable  to  keep  each  kind  of  receivable 
in  an  account  by  itself.  Consignees'  accounts  are  not  receivable  until  the  goods  are 
sold,  and  are  frequently  carried  as  memorandum  accounts. 


PROBLEM  27 
(Wisconsin,  1918) 

In  checking  the  inventory  sheets  and  ledger  accounts  dealing  with  mate- 
rials you  found  that  the  following  errors  had  occurred : 

December  31,  1916.  An  item  of  $500  was  added  to  inventory  sheet  after 
totals  had  been  obtained  and  was  not  entered  in  the  ledger  account. 

39 


December  31,  1916.  An  error  of  $1,000  in  adding  the  inventory  extensions 
resulting  in  an  overstatement  of  the  inventory  by  this  amount. 

December  31,  1917.  An  error  is  made  in  valuing  one  lot  of  material,  the 
result  of  v^hich  is  an  overstatement  of  the  inventory  value  to  the  amount  of 
$2,000. 

December  31,  1917.  An  error  of  $10,000  in  footing  the  inventory  exten- 
sions, resulting  in  an  understatement  of  the  ledger  inventory  value  by  this 
amount. 

December  31,  1917.  An  invoice  of  $4,000  for  materials  just  received  in- 
cluded in  Accounts  Payable  but  "the  amount  was  not  included  in  the  inventory. 

You  are  asked  to  draft  the  necessary  journal  entry  or  entries  to  correct 
these  errors,  and  to  show  the  net  effect  of  the  errors  upon  the  profits  of  each 
of  the  two  years.  Assume  that  the  profits  shown  on  the  ledger  for  1916  were 
$20,000  and  for  1917,  $30,000. 

Comment. — This  problem  illustrates  the  fact  that  an  overstatement  of  assets  at  the 
end  of  a  period  results  in  an  equal  overstatement  of  profits. 

PROBLEM  28 

The  purchases  for  a  certain  department  made  during  the  month  of  April 
amounted  to  $60,000.  The  goods,  upon  purchase,  were  immediately  "marked 
up"  for  selling  purposes  with  50%  of  the  cost  price,  and  transactions  then 
took  place  as  follows : 

Sales: 

May $  8,000 

June 6,100 

July ■ 10,000 

August 11,370 

September 7,000 

October  6,000 

N  ovember  .  . .  •  • 6,000 

Total $54,470 

Price  Changes: 

On  May  31,  all  goods  were  marked  up  S%. 
On  June  30,  all  goods  were  marked  up  4%. 
On  July  31,  all  goods  were  marked  down  25^%. 
On  August  31,  all  goods  were  marked  down  5%. 
On  September  30,  all  goods  were  marked  down  4%. 

On  December  1,  the  inventory  of  the  goods  remaining  in  the  department 
was  taken. 

(a)  What  was  the  total  selling  value  of  the  inventory  in  the  department 
on  December  1  ? 

(b)  In  closing  the  books  of  the  department,  what  value  should  be  used 
to  represent  the  inventory  ?    Explain  how  that  amount  was  obtained. 

PROBLEM  29 

(Illinois,  1907) 

A  corporation's  balance  sheets  for   August,   1907,  and  September,    1907. 

were  respectfully  as  follows : 

Assets:  August,  1907 

Plan  and  Equipment   $4,000,000.00 

Furniture ■  • 6,000.00 

Tools 3,000.00 

-^0 


Stable 3,811.28 

Cash 15,250.36 

Material.  Supplies ■  • 30,750.28 

Accounts  Receivable , 28,920.13 

Unexpired  Insurance 510.29 

Total $4,088,242.34 

Liabilities: 

Capital  Stock  $2,500,000.00 

Bonds 1,350,000.00 

Accounts  Payable 31,336.28 

Bills  Payable       26,240.12 

Accrued  Taxes  •  • 3,500.00 

Accrued  Interest 5,625.00 

Profit  and  Loss •  • 171,540.94 

Total $4,088,242.34 

Assets:  September,  1907 

Plant  and  Equipment $4,012,310.21 

Furniture •  • 6,205.58 

Tools 3,218.86 

Stable 4,009.37 

Cash • 8,328.29 

Material,  Supplies 39,280.17 

Accounts  Receivable •  • 32,321.83 

Unexpired  Insurance  832.12 

Total $4,106,506.43 

Liabilities: 

Capital  Stock  $2,500,000.00 

Bonds 1,362,000.00 

Accounts  Payable  33,445.57 

Bills  Payable  18,240.12 

Accrued  Taxes 4,000.00 

Accrued  Interest •  • 11,250.00 

Profit  and  Loss  177,570.74 

Total $4,106,506.43 

Analyze  the  differences  in  the  corresponding  accounts  for  the  period  and 
show  disposition  of  increased  resources. 

Comment. — Prepare  comparative  balance  sheets,  showing  increases  and  decreases 
in  the  amount  of  the  accounts. 

PROBLEM  30 
(New  York,  June,  1915) 

The  following  is  a  comparative  balance  sheet  at  December  31,  1910,  and 

at  December  31,  1911,  presented  to  the  board  of  directors  of  the  Western 
Company  at  its  meeting  January  5,  1912. 

Assets                    December  December 

31,1910  31,1911 

Land $  20,000.00  $  25,000.00 

Buildings 45,000.00  45,000.00 

Machinery  and  Tools  86,000.00  89,000.00 

Horses,  Wagons  and  Harnesses 1C,500.00  10,500.00 

Patents 6,000.00  6,000.00 

Good  Will 25,000.00  25,000.00 

Cash  .  28,300.00  10,300.00 

Accounts  Receivable   29,600.00  26,550.00 

Investments  and  Bonds 15,000.00 

Inventory— Goods  in  Process 10,800.00  14,690.00 

Inventory— Material  and  Supplies 6,750.00  10,300.00 

Agency  Investments   3,680.00 

$267,950.00       $281,020.00 
41 


Liabilities 

Bonds  and  Mortgage  Payable $  20,000.00 

Notes  Payable  $  35,000.00  2,000.00 

Accounts  Payable 16,400.00             19,350.00 

Reserves  for  Depreciation 2,500.00              6,750.00 

Discount  on  Bonds 1,000.00 

Capital  Stock: 

Preferred   150,000.00  150,000.00 

Common    50,000.00            50,000.00 

Surplus  14,050.00            31,920.00 


$267,950.00        $281,020.00 

The  land  increase  was  due  to  appraisal  based  on  rise  of  values  of  factory- 
sites  in  the  immediate  vicinity. 

Together  with  the  above  balance  sheet,  there  was  submitted  to  the  board 
a  statement  of  income  and  profit  and  loss  showing  the  profits  of  the  year  to 
have  been  $22,120. 

The  directors  state  to  the  auditor  that  in  view  of  the  decrease  of  cash 
and  accounts  receivable,  of  the  absence  of  dividends,  and  of  the  increase  of 
capital  liabilities,  they  are  unable  to  ascertain  what  has  become  of  the  profits 
of  the  year. 

Prepare  a  statement  to  show  clearly  how  the  Western  Company  has 
applied  such  resources  of  the  year  1910  as  have  been  lost  in  1911  and  the 
resources  and  profits  of  the  year  1911. 


PROBLEM  31 
(Kentucky  1917) 

On  January  4,  1917,  the  following  comparative  balance  sheet  was  sub- 
mitted to  the  Board  of  Directors  of  the  Lewis  Jones  Company : 

Assets 

December  December 

31,  1915  31,  1916 

Cash    $  32,500.00  $  12,100.00 

Accounts  Receivable 34,400.00  28,200.00 

Bonds  1,300.00  27,300.00 

Inventory,  Goods,  Process  of  Mfg 12,200.00  16,400.00 

Inventory,  Material  and  Supplies 15,100.00  20,500.00 

Real  Estate 20,000.00  20,000.00 

Buildings   42.000.00  47,000.00 

Machinery  and  Tools 87,000.00  90,000.00 

Automobiles,    Trucks 12,000.00  12,000.00 

Insurance    400.00  600.00 

Patents    5,000.00  5,000.00 

Good    Will 30.000.00  30,000.00 

$291,900.00  $309,100.00 
Liabilities 
Capital  Stock 

Preferred    $50,000.00  $50,000.00 

Common    100,000.00  100,000.00 

Accounts    Payable 51,200.00  16,100.00 

Bonds  and  Mortgage  Payable 2,000.00  18,000.00 

Discount  on  Bonds 500.00  1,500.00 

Reserve  for  Depreciation 4,500.00  6,500.00 

Surplus    83,700-00  117,000.00 

$291,900.00  $309,100.00 
42 


Together  with  the  above  balance  sheet  there  was  also  submitted  to  the 
Board  of  Directors  a  statement  of  Profit  and  Loss,  showing  the  profits  of  the 
year  to  have  been  $35,300. 

The  directors  desire  a  statement  showing  what  has  become  of  the  profits 
for  the  year  and  why  they  cannot  declare  a  large  dividend  in  view  of  the  fact 
that  they  have  apparently  earned  $35,300. 

Prepare  a  statement  to  show  clearly  how  the  Lewis  'Jones  Company 
applied  the  profits  for  year  ending  December  31,  1916. 

Comment. — This  problem  is  similar  to  one  of  Esquerre's  problems  on  page  388  of 
his  Applied  Theory  of  Accounts.  Notice  the  difference  between  the  two  figures  indicat- 
ing profits  and  the  amount  of  the  increase  in  the  depreciation  reserve.  The  problem 
is  similar  to  the  two  immediately  preceding. 

PROBLEM  32 

(Adapted  from  Illinois,  May,  1906) 

A  manufacturing  company  that  had  been  in  business  several  years  began 
operations  January  1,  1921,  in  an  entirely  new  plant,  the  building  of  which  was 
made  necessary  by  the  depreciation  of  the  old  plant.  The  cost  of  the  new  plant 
was  $200,000  and  its  estimated  life  20  years.  To  finance  the  new  construction, 
there  were  issued  10  obligations  of  $20,000  each,  bearing  6%  interest,  and 
maturing  one  each  year  starting  with  January  1,  1922.  The  old  plant  was  sold 
for  $10,000  in  December,  1920,  at  which  time  the  following  financial  statement 
was  prepared : 

Plant  $225,000.00 

Less  Scrap  Value 10,000.00        $215,000.00 

Other  Assets 80,000.00 

Total  $295,000.00 

Liabilities  and  Proprietary  Interest 

Capital  Stock  $200,000.00 

Surplus  50,000.00 

Profit  and  Loss: 

Gross  Sales  for  Year $100,000.00 

Less  Operating  Expenses 75,000.00  25,000.00 

Floating  Debt    20,000.00 

Total  $295,000.00 

Owing  to  competition  and  limited  use  of  the  products,  the  sales  have  been 
uniform  for  a  number  of  years,  and  could  not  be  expected  to  increase,  but  the 
new  and  improved  machinery  with  better  methods  of  manufacture,  saves  10% 
in  operating  expenses  (including  therein  6%  interests  on  borrowed  money)  by 
their  method  of  accounting.  The  books  have  shown  an  annual  net  earning  of 
$25,000. 

At  the  close  of  the  first  year's  operation  of  the  new  plant,  the  financial 
statement  showed  as  follows: 

Plant  $415,000.00 

Other  Assets 112,500.00 

Total $527,500.00 

48 


Liabilities  and  Proprietary  Interest 

Capital  Stock  $200,000.00 

Surplus 75,000.00 

Profit  and  Loss: 

Sales  for  year $100,000.00 

Less  Operating  Expenses 67,500.00  32,500.00 

Notes  Payable  200,000.00 

Floating  DeBt    20,000.00 

Total $527,500.00 

The  financial  statement  is  submitted,  and  a  iHvidend  is  declared. 
Discuss  all  the  foregoing,  and  draw  up  a  statement  showing  what,  in  your 
opinion,  is  the  true  financial  condition  of  the  company. 


PROBLEM  33 
(Adapted  from  Illinois,  May,  1915) 

The  Greenleaf  Manufacturing  Company  began  operations  January  1,  1919, 
The  financial  statements  at  December  31,  1919,  and  December  31,  1920,  may 
be  summarized  as  follows : 

Dec.  31,  1919  Dec.  31, 1920 

Cash    $     25,000.00  $     20,000.00 

Accounts  Receivable   175,000.00  250,000.00 

Inventories    400,000.00  385,000.00 

Buildings  475,000.00  810,000.00 

Reserve  for  Depreciation  on  Buildings 25,000.00  60,000.00 

Machinery  210,000.00  430,000.00 

Reserve  for  Depreciation  on  Machinery...        10,000.00  30,000.00 

Land    40,000.00  40,000.00 

Unexpired  Insurance  3,000.00  4,000.00 

Investment  in  Stocks  and  Bonds 95,000.00 

Goodwill 200,000.00  260,000.00 

$1,588,000.00        $2,109,000.00 

Accounts  Payable  $  125,000.00  $    125,000.00 

Bank  and  Other  Loans 70,000.00  80,000.00 

Bonds   350,000.00  500,000.00 

Accrued  Interest 7,000.00  11,000.00 

Accrued  Taxes 4,000.00  6,000.00 

Capital  Stock   800,000.00  1,100,000.00 

Surplus  212,000.00  287,000.00 

$1,588,000.00        $2,109,000.00 

During  the  year  a  dividend  of  4%  was  declared  and  paid  on  the  stock 
outstanding  at  the  beginning  of  the  year.  The  bonds  were  sold  for  par,  and 
the  stock  at  80  and  the  difference  was  charged  to  goodwill  account. 

In  the  light  of  the  above  facts  interpret  the  changes  that  have  taken  place 
in  the  financial  position  of  the  company  between  the  two  dates  and,  so  far  as 
possible,  indicate  how  they  were  effected. 


PROBLEM  34 
(American  Institute,  November,  1919) 

The  following  are  the  balance  sheets  of  the  ABC  Company  on  December 
31,  1919  and  December  31,  1920. 

44 


Assets 

December  December 

31,  1919  .31,  1920 

Cash    $   200,000.00  $   550,000.00 

Accounts   Receivable 850,000.00  800,000.00 

Inventories   1,000,000.00  1,160,000.00 

Capital  Assets 600,000.00  900,000.00 

Deferred    Charges 20,000.00  10,000.00 

$2,670,000.00  $3,420,000.00 

Liabilities,  Reserves  and  Proprietary  Interest 

Accounts  Payable $    500,000.00  $    600,000.00 

Bank  Loans 750,000.00  400,000.00 

Bonds    (issued   at   par) 500,000.00 

Reserve  for  Replacements  and  Depreciation...      100,000.00  200,000.00 

Capital    Stock 1,000,000.00  1,000,000.00 

Capital  Surplus 150,000.00 

Earned    Surplus 320,000.00  570,000.00 

$2,670,000.00  $3,420,000.00 

Notations : 

The  capital  assets  were  revealed  by  appraisal  on  December  31,  1920.  Part 
of  the  increase  in  value  was  credited  to  Capital  Surplus  and  another  part  was 
credited  to  Reserve  for  Replacements  and  Depreciation. 

The  profits  for  the  year  were  $450,000  and  dividends  amounting  to 
$200,000  were  paid  during  the  year. 

The  sum  of  $100,000  was  charged  to  operation  for  depreciation  during  the 
year,  and  $50,000  was  charged  against  the  reserve  on  account  of  replacements 
made. 
Prepare : 

(a)  The  comparative  balance  sheets  in  form  showing  the  increases  and 
decreases  during  the  year. 

(b)  Schedules  and  brief  comments  showing,  as  nearly  as  possible,  the 
intermediate  transactions. 

PROBLEM  35 

The  following  financial  statements  show  the  financial  condition  of  the 
Famous  Players-Lasky  Corporation  at  the  dates  mentioned.  A  summary  is 
also  given  of  the  gross  and  net  profits  for  the  years  ending  on  the  dates  the 
financial  statements  were  taken. 

Assets 

Dec,  1918            Dec.  1919  Dec,  1920 

Property,    Plant,    etc $      757,787.00        $  4,096,2.S8.00  $9,648,197.00 

Investments     500,328.00            2,494,775-00  6,394,276.00 

Deferred   Charges,   etc 276,893.00               866,202.00  1,445,976.00 

Good    Will 7,611,445.00            7,655,680.00  7,538,122.00 

Cash     647,461.00            8.282,800.00  5,119.573.00 

Receivables 4,428,445.00            5.725,736.00  5,785,018.00 

Inventory 4,658,950.00            7,692,784.00  12,889,965.00 

Marketable    Securities 834,402.00  300,396.00 

Total   ..$18,881,309.00        $37,648,637.00  $49,121,523.00 

Liabilities 

Capital  Stock  Preferred $10,000,000.00  $  9,650.000.00 

Capital  Stock  Common $13,406,080.00          16,013,780.00  16,937,330.00 

Notes   (not  due) 3.472,494.00 

46 


Minority    Interests 405,000.00  310,500.00  296,792.00 

Advance  Payments  Films..  1,093,608.00  1,981,636.00  2,180,279-00 

Bills  and  Accounts  Payable  2,428,666.00  4,894,593.00  6,103,243.00 

Estimated   Taxes,    etc 156,552.00  1,328,762.00  3,343,527.00 

Surplus  and  Reserves 1,391,403.00  3,119,366.00  7,137,858.00 

Total    $18,881,309.00        $37,648,637.00        $49,121,523.00 

Gross   Earnings $18,048,433.00        $27,165,327.00        $36,000,000.00 

Net  Profits  (after  all  charges)    1,281,175.00  3,109,226-00  5,337,129.00 

Prepare : 

A  comparative  financial  statement  showing  increases  and  decreases  for 
the  years  1918,  1919  and  1920.  x'\rrange  the  items  according  to  the  methods 
followed  in  the  laboratory. 

PROBLEM  36 

(Adapted  from  Illinois,  May,  1916) 

Criticise  the  following  financial  statement  of  the  Cleveland  Building  Com- 
pany for  the  year  ended  December  31,  1921 : 

Assets 
Fixed  Assets: 

Goodwill   $   500,000.00 

Patent  Rights,  etc.,  at  cost $  53,000.00 

Patent  Fees,  etc.,  paid  during  year 1,216.00  54,216.00 

Plant  and  Machinery,  at  cost 58,222.00 

$   612,438.00 

Investment  in   Branch— Detroit 102,000.00 

Deferred  Charges: 

Dividend  on  Preferred  Stock  paid  in  advance. $     1,500.00 

Interest  and  Insurance  paid  in  advance 2,103.00  3,603.00 

Current  and  Working  Assets: 

Cost   of  unfinished   contracts,   including  ma- 
chinery in  use $  52,125.00 

Add:   Estimated   Profit— 20% 10,425.00 

$  62,550.00 
Inventory  of  Materials  and  Supplies,  at  cost.  12,307.00 
Notes  Receivable — Customers  and  for  Capital 

Stock 512,000.00 

Accounts  Receivable  14,218.00 

Cash  in  Bank 5,260.00 

Cash  on  Hand  and  advanced  to  agents 14,817.00  621,152.00 

Total $1,339,193.00 

Deduct:  Deficit  58,618.00 

$1,280,575.00 
Liabilities 
Capital  Stock: 

6%    Preferred.    1,000    shares    of    $100.00    each    fully    paid 

(Issued  at  90%) $     90,000.00 

Common,  10,000  shares  of  $100.00  each 1,000,000.00 

$1,090,000.00 
Due  to  Branch— Toledo 190,575.00 

$1,280,575.00 
46 


PROBLEM  37 

(Massachusetts,  1917) 

A  corporation  was  organized  and  began  business  January  1,  1915.  On 
December  31,  1916,  it  closed  its  books  and  presented  a  statement  to  its  bank, 
the  statement  embodying  the  accounts  as  given  below. 

The  bank  not  being  satisfied  with  the  statement,  instructs  you  to  prepare 
and  certify  a  new  one.  You  find  that  Depreciation  reserves  on  buildings  and 
property  have  never  been  set  up.  In  connection  with  the  machinery,  dies  and 
patterns,  you  find  that  the  business  operates  under  valuable  patents  granted 
January  1,  1915,  and  that  the  machinery,  dies  and  patterns  are  planned  and 
expected  to  last  during  the  life  of  the  patents.  The  patents  used  by  the  cor- 
poration will  not  be  subject  to  renewal. 

The  product  is  sold  on  a  20  per  cent,  margin  of  gross  profit.  5  per  cent, 
allowed  to  all  customers  for  cash  discount  and  all  customers'  accounts  are 
collectible.  Salesmen  sell  goods  on  commission  and  are  allowed  to  draw  in 
advance  as  required. 

Preferred-stock  dividends  were  paid  semi-annually  at  the  annual  rate  of 
7  per  cent.  Preferred  stock  was  retired  on  December  30,  1916,  at  115,  the 
January  1,  1917,  dividend,  not  yet  paid,  to  go  to  the  stockholder.  Common 
stock  dividends  have  been  paid  at  the  rate  of  5  per  cent,  each  year  on 
December  1. 

A  judgment  was  recorded  against  the  corporation  for  $5,000.00  in  Decem- 
ber, and  the  treasurer  states  that  he  does  not  wish  it  to  appear  in  the  state- 
ment for  the  year. 

There  is  a  law  suit  pending  against  the  corporation  for  $20,000,  based 
according  to  the  corporation's  attorney  on  grounds  hard  to  defend. 

TRIAL  BALANCE 

Debit  Credit 

Machinery  $      85,000.00 

Land  8,000.00 

Buildings— Brick   38,000.00 

Wooden  28,000.00 

Patents   400,000.00 

Accounts  Payable— Purchase  Ledger $    178,000.00 

Notes    Payable 200,000.00 

Mortgage  Payable 54,000.00 

Finished  Goods  (Selling  Value) 100,000.00 

Prepaid   Insurance 7,850.00 

Cash    55,000.00 

Dies  and  Patterns 34,000.00 

Prepaid  Interest 4,400.00 

Customers'    Ledger 189,500.00 

Personal    Accounts — Salesmen 4,500-00 

Officers    4,000.00 

Goods  in  Process  (Cost) 40,000.00 

Raw  Materials  (Cost) 170,000.00 

Supplies    2,500.00 

Preferred  Stock  Retired 37,950.00 

Personal  Accounts — Officers    2,200.00 

Salesmen    3,000.00 

Preferred  Stock 250,000.00 

Common  Stock  400,000.00 

Accrued  Pay  Roll 4,000.00 

Surplus  117,500.00 

$1,208,700.00        $1,208,700.00 

a.  Prepare  revised  balance  sheet. 

b.  State  the  profits  for  the  past  two  years  after  paying  preferred  stock 

dividends. 

47 


c.  The  expenses  of  selling  and  distributing  the  product  leave  a  margin 
of  net  profit  equivalent  to  ^  of  the  gross  profit. 

What  were  the  total  gross  sales  in  the  two  years  ? 

Comment. — For  the  purposes  of  this  problem  assume  that  interest  and  discount 
charges  are  included  in  selling  and  distributing  expenses  and  that  the  20%  margin  is  on 
sales  rather  than  cost.     The  following  points  need  careful  consideration: 

1.  Finished  Goods  Inventory. 

2.  Preferred  Stock  Retired. 

3.  Contingent  Liability  on  Account  of  Litigation. 

4.  Depreciation. 

PROBLEM  38 

(Wisconsin,  May,  1919) 
On  January  2,  1916,  the  X  Manufacturing  Company  took  over  the  busi- 
ness of  Brown  and  Smith.    The  capitalization  of  the  company  was  $400,000, 
divided  as  follows : 

7%  Cumulative  Preferred  Stock  $200,000.00 

Common  Stock   200,000.00 

On  March  1,  1919,  the  annual  stockholders  meeting  was  held  and  the 
following  financial  statement  was  presented : 

X  MANUFACTURING  COMPANY 
FINANCIAL  STATEMENT,  DECEMBER  31,  1918 

Real  Estate  $    5,000.00 

Buildings    $125,000.00 

Less  Reserve  for  Depreciation 2,500.00  122,500.00 

Equipment  $380,000.00 

Less  Reserve  for  Depreciation 4,800.00  375,200.00 

Inventories: 

Raw  Material  30,000.00 

Goods  in  Process 75,000.00 

Finished  Goods   65,000.00 

Sundry  Factory  Supplies 5,000.00 

Accounts  Receivable 15,000,00 

Notes  Receivable    '. 5,000.00 

Cash 10,000.00 

Prepaid  Expense  Items 5,000.00 

Total  Assets  $712,700.00 

Liabilities 

Notes  Payable $180,000.00 

Accounts  Payable  50,000.00 

Reserve  for  Taxes 3,000.00 

Accrued  Salaries  and  Wages 2,000.00 

Total  Liabilities 235,000.00 

Proprietary  Interest 

Preferred  Stock $200,000.00 

Common  Stock   200,000.00 

Surplus  77,000.00 

Total  Proprietary  Interest 477,000.00 

The  stockholders  authorize  the  issuance  of  $300,000  of  5  per  cent,  first 
mortgage  bonds,  the  proceeds  of  which  are  to  be  used  to  pay  the  current  debts 
and  for  necessary  improvements  in  the  buildings  and  equipment. 

The  Company  has  given  the  above  financial  statement  and  the  following 


summary  operating  statements  to  the  A  Bond  Company,  who  may  purchase 
the  entire  issue  at  95.  The  A  Bond  Company,  in  turn,  asks  you  to  verify 
the  statements  and  to  report  upon  the  advisability  of  the  purchase. 

X  MANUFACTURING  COMPANY  SUMMARY  OPERATING 
STATEMENTS 

1916        1917        1918 

Sales   $690,700.00        $720,900.00        $870,200.00 

Cost  of  Production 560,000.00  690,800.00  706,700.00 

Gross  Profits   $130,700.00        $30,100.00        $163,500.00 

Selling  Expenses  25,000.00  28,100.00  31,000.00 

Net  Operating  Profit $105,700.00        $    2,000.00        $132,500.00 

Interest    and    other    Financial    Ex- 
penses       25,000.00  22,000.00  27,500.00 

Net  Profit  or  Loss $  80,700.00        $  20,000.00        $105,000.00 

Dividends  Paid 28,000.00  14,000.00  28,000.00 

Balance  in  Surplus $  52,700.00        $  18,700.00        $  77,000.00 

Outline  the  report  requested  by  the  A  Bond  Company,  state  the  reasons 
for  your  conclusions  according  to  data  available,  and  also  detail  other  points 
which  should  be  investigated  before  a  definite  decision  as  to  the  purchase  is 
made. 

Comment. — Some  of  the  points  in  this  problem  requiring  special  thought  and  atten- 
tion are  the  following: 

1.  Depreciation. 

2.  Relation  between  value  of  fixed  assets  and  total  capital  at  the  start. 

3.  The  adequacy  of  working  capital. 

4.  The  cause  of  the  relatively  larger  production  in  1917. 

5.  The  fixed  assets  which  will  be  security  for  the  bonds. 


PROBLEM  39 

(Wisconsin,  November,  1919) 

The  following  balance  sheet  has  been  published  by  the  X  Company  as 
showing  the  condition  of  the  business  after  the  sale  of  $10,000,000.00  of  the 
first  preferred  stock  and  all  of  the  second  preferred  stock  noted  therein.  A 
prospective  purchaser  of  some  of  the  stock  asks  you  to  tell  him  book  values 
of  each  class  of  stock,  amounts  of  net  tangible  and  net  quick  assets  for  tho 
appropriate  class  or  classes  of  stock,  and  to  advise  him  whether  to  purchase 
the  first  preferred  at  95  or  the  common  at  90: 

Land,  Buildings,   Machinery $  7,000,000.00 

Good  Will  and  Patents 8,000,000.00 

Investments 500,000.00 

Cash 10,715,000.00 

Inventories 13,000,000.00 

Accounts  and  Notes  Receivable 10,000,000.00 

Other  Current  Assets 450,000.00 

Deferred  Charges 335.000.00 

$50,000,000.00 
49 


Liabilities 

Capital  Stock: 

7%  Cumulative  First  Preferred $15,000,000.00 

7%  Cumulative  Second  Preferred 5,000,000.00 

Common  Stock,  75,000  Shares  no  Par  Value 6,000,000.00 

Notes  and  Accounts  Payable 13,000,000.00 

Dividends  Payable  52,500.00 

1919  Federal  Taxes 1,000,000.00 

Reserve  for  Depreciation 3,447,500.00 

Surplus 6,500,00000 

$50,000,000.00 

The  par  value  of  the  preferred  stock  shares  is  $100.00.  It  is  expected  that 
a  quarterly  dividend  of  $2.00  per  share  w^ill  be  paid  upon  the  common  stock. 

In  your  report  mention  such  matters  as  it  w^ould  seem  advisable  to  know 
in  addition  to  those  contained  in  the  statement  given  above. 


PROBLEM  40 

(Missouri,  1914) 

The  trial  balance  of  the  Interstate  Manufacturing  Company,  on  June  30, 
1912.  after  closing  entries  have  been  made,  is  given  below: 

Patents  and  Goodwill ' $    250.000.00 

Office  Furniture 8,746.00 

Inventory.  June  30,  1912: 

Raw  Material  83,247.00 

Supplies  4,932.00 

Finished  Goods  42,761.00 

Pettv  Cash 100.00 

Land    270,000.00 

Buildings    165,000.00 

Machinery    235,00000 

Cash  Subject  to  Check 69,433.00 

Accounts  Receivable 273,842.00 

Common  Capital  Stock $    500,000.00 

Preferred  Capital  Stock 500,000.00 

Bonds,  6%  50-year  1st  Mortgage,  Issued  June 

30,  1912 200,000.00 

Premium  on  Bonds 20,000.00 

Preferred  Stock  Dividends  Payable  August,  1912  17,500.00 

Common  Stock  Dividends  Payable  August.  1912  12,50000 

Reserve  for  Bad  and  Doubtful  Accounts 8,294.00 

Undivided  Surplus   66,375.00 

Accounts  Payable 78,392.00 

$1,403,061.00        $1,403,061.00 

During  the  year  ending  June  30,  1913,  the  company  purchased  29,047  tons 
of  raw  material  at  $22  per  ton,  which  was  delivered  before  the  books  closed. 
Of  the  amount  purchased,  payment  has  been  made  for  26,647  tons.  They 
have  also  made  payments  for  the  following  accounts : 

Accounts  payable,  $78,392;  salaries,  $80,360;  selling  expense,  $86,017; 
labor,  $468,932 ;  shop  expense,  $9,461  ;  taxes,  $7,842 ;  repairs  and  maintenance, 
$30,955 ;  office  expense,  $2,478 ;  and  supplies,  $37,637. 

Customers  have  paid  $1,502,927  in  cash,  and  have  been  given  discounts 

50 


amounting  to  $18,395.  Returns  and  allowances  amount  to  $8,474.  Bad  debts 
written  off,  $2,407.    Rents  received,  $500,  and  sales,  $1,515,572. 

Fifty  thousand  dollars  was  borrowed  on  call  on  June  30,  1913,  the  market 
value  of  the  collateral  security  being  $72,100.00. 

The  inventory  on  June  30,  1913,  is  made  up  of  finished  goods,  $20,495; 
supplies,  $8,129,  and  2,163  tons  of  raw  material,  the  market  price  of  which 
is  $24  per  ton.    The  land  is  estimated  to  be  worth  $300,000. 

Semi-annual  dividends  of  3^^  per  cent,  on  the  preferred  stock  and  2^  per 
cent  on  the  common  stock  have  been  paid  from  the  earnings  of  the  half  year 
ending  December  31,  1912.  Dividends  at  the  same  rate  have  been  declared 
on  the  preferred  and  common  stock  for  the  last  half  of  the  fiscal  year,  payable 
in  August,  1913. 

You  are  asked  to  set  up  a  balance  sheet  dated  June  30,  1913,  and  accom- 
pany it  with  a  statement  which  will  show  correctly  the  Operations  of  the 
company. 

The  following  annual  rates  of  depreciation  are  to  be  assumed : 

Buildings,  3  per  cent.;  machinery,  7^  per  cent.;  office  furniture.  10  per 
cent.  It  is  also  assumed  that  there  should  be  a  reserve  for  bad  and  doubtful 
accounts  equal  to  3  per  cent,  of  the  balance  of  accounts  receivable.  Calculate 
these  percentages  to  the  nearest  dollar. 

Comment. — This  problem,  illustrating  interim  accounts  may  best  be  worked  on 
twelve  column  working  paper  first.  It  consists  simply  of  making  the  entries  in  the 
adjustment  columns  for  the  totals  of  transactions  that  took  place  during  the  year.  Care 
should  be  taken  in  dealing  with  the  estimated  worth  of  the  land.  After  completing  the 
working  sheet,  the  operating  and  financial  statements  should  be  drawn  off  on  journal 
paper. 

PROBLEM  41 

(Adapted  from  Institute  Examination,  November,  1917) 

The  following  is  the  financial  statement  of  the  A  B  Company  for  January 
1,  1915: 

Assets 

Cash  $  52,864 

Accounts  Receivable $197,425 

Less  Reserve  for  Bad  Debts 4,718  192,707 

Inventories: 

Raw  Materials. ,  , , $  84,268 

Finished   Goods 31,597  115,865 

Furniture  and  Fixtures 7,500 

Real  Estate 180,000 

Buildings    150,000 

Machinery 250,000 

Total   Assets $948,936 

Liabilities 

Accounts  Payable $  35,482 

Dividends  Payable  Preferred  Stock,  2/1/15.  .  7,500 

Dividends  Payable  Common  Stock,  2/1/15.  .  10,000 
Mortgage    Bonds,    20    years    at    6%    dated, 

1/1/15    100,000 

Premium  on  Bonds •. .  5,000 

Total  Liabilities 157,982 

Capital  ■  Stock 
Capital    Stock— Preferred .  $250,000 

51 


Capital  Stock — Common 500,000 

Surplus    40,954        $790,954 

The  following  transactions  took  place  during  the  year  ending  December  31,  1915: 

Account  Receivable  Collected $793,501 

Rent   Received .  .• 600 

Raw  Material  Purchases  1,232,000  lbs.  at  20  cents: 

Sales $823,334 

Discount   on   Sales 23,519 

Bad  Debts  Written  Of? 2,143 

Disbursements  have  been  made  for: 

Accounts  Payable $243,356 

Manufacturing  Expenses: 

Factory  Expenses $     3,489 

Factory   Labor 351,426 

Factory  Repairs  23,843    * 

Taxes 7,853  390,611 

Trading  Expense 52,914 

Administrative  Expenses: 

Office  Expense   $     1,927 

Salaries    58,471  60,398 

Inventories,  December  31,  1916: 

Raw  Material — 412,595  lbs.  with  a  market  value  of  22  cents. 

Finished    Goods $30,842 

Semi-annual  interest  on  bonds  was  paid  July  1. 

Semi-annual  dividends  of  3%  on  the  preferred  and  2%  on  the  common  were 
declared  in  June  and  December  and  payable  August  1,  and  February  1.  The  following 
rates  for  depreciation  reserves  are  to  be  used: 

Buildings,  3%. 

Machinery,   5%. 

Furniture  and  Fixtures,   10%. 

The  Reserve  for  Bad  Debts  account  should  be  brought  up  to  2%  of  the 
Accounts  Receivable  as  of  December  31,  1915. 

Prepare  operating  and  financial  statements  as  of  December  31,  1916. 


PROBLEM  42 
(New  York,  January,  1916) 

John  Smith  is  in  business  for  himself.  His  net  assets  are  $18,000,  his  net 
liabilities  $10,000.  At  this  time  he  makes  the  following  proposal  in  writing, 
to  his  manager,  Frank  Doe : 

"Give  me  $5,000  in  cash,  and  I  will  make  of  you  an  equal  partner,  chang- 
ing the  firm  name  to  John  Smith  &  Co.  I  will  continue  to  draw  a  salary  of 
$60  per  week  and  you  will  get  $50  per  week."  Mr.  Doe  accepted  this  offer, 
by  writing  across  its  face,  in  red  ink :  "This  suits  me.  I  accept."  Mr.  Doe 
a  few  days  later  delivered  to  Mr.  Smith  $1,200  in  cash  and  $3,800  in  checks. 
Show  the  entry  or  entries  in  the  books  of  John  Smith  which  will  continue 
to  be  employed  by  the  partnership. 

Comment. — It  is  not  clear  from  the  statement  of  this  problem  whether  the  money 
paid  in  by  Frank  Doe  is  to  remain  in  the  busness  or  is  to  go  to  John  Smith,  personallj'. 
The  student  should  solve  the  problem  according  to  each  assumption,  though  the  latter 
is  probably  the  assumption  of  the  person  who  made  up  the  problem-  Good  will  may  be 
assumed  to  enter  into  the  problem.  The  student  should  be  able  to  prepare  solutions 
either  with  or  without  good  will  appearing  on  the  ledger.  There  are,  therefore,  four 
possible  methods  of  solving  the  problem. 

52 


PROBLEM  43 
(California,  1908) 

Two  partners,  named  Wilson  and  Peters,  find  at  the  end  of  the  first  year's 
business  the  Balance  Sheet  shows  that  Wilson's  interest  is  worth  $18,000.00 
and  Peters'  $9,000.00. 

The  good  will  of  the  firm  is  worth  $3,000.00.     Each  draws  profits  in  pro-- 
portion  to  his  investment. 

They  conclude  to  take  in  another  partner,  and  he  is  to  have  a  one-quarter 
interest  in  the  new  firm. 

What  sum  must  the  new  partner  contribute?  How  will  the  partnership 
accounts  appear  after  the  payment  in  of  the  additional  capital? 

How  will  the  profits  be  divided?    Give  skeleton  form  of  accounts. 

Comment. — The  phrases  "new  firm"  and  "additional  capital"  in  this  problem  are 
very  significant. 

PROBLEM  44 
(Illinois,  May,  1914) 

A  and  B,  equal  partners  in  a  manufacturing"  business,  admit  their  factory 
superintendent,  C,  as  an  equal  partner  with  them  in  the  profits  without  his 
furnishing  any  capital,  A  and  B  reserving  to  themselves  in  case  of  dissolution 
any  good  will  which  may  have  accrued  to  the  business. 

On  December  31,  1912,  a  balance  sheet  was  drafted  and  approved  by  all 
concerned  as  follows : 

Assets 

Real  Estate  and  Plant $  90.000.00 

Merchandise    Inventory 35,000.00 

Accounts    Receivable    25.000.00 

Bills  Receivable 15,000.00 

Cash  and  Bank  Funds 18.000.00 

$183,000.00 
Liabilities 

Bills  Payable $  10,000.00 

Accounts    Payable 12,500.00 

A's  Account $  4.500.00 

B's  Account 4,000.00 

Cs  Account 2,000.00        $  10,500.00 

Capital  Accounts 

A    $75,000.00 

B    75,000.00 

—        $150,000.00 

$183,000.00 

Later  the  business  was  sold  as  a  "going"  concern  and  the  partnership 
dissolved.  The  purchaser  assumes  all  outside  liabilities  and  pays  the  sum  of 
$225,000  cash,  of  which  the  real  estate  and  plant  is  valued  at  $120,000.  Draft 
the  settlement  accounts  as  between  the  partners. 

Comment. — The  following  points  are  to  be  observed  in  this  problem: 

1.  An  investment  is  not  necessary  to  constitute  an  interest  in  a  business  as  a  partner. 

2.  Realized  increases  in  the  value  of  capital  assets  are  divided  among  partners  the 
same  as  operating  profits. 

3.  Good  will,  by  agreement  ,is  divided  on  a  different  basis  from  that  usually  followed. 
Partners'  personal  accounts  should  not  be  confused  with  outside  liabilities. 

63 


PROBLEM  45 

A  and  B  are  equal  partners  and  their  financial  statement  on  May  31,  1921 
is  as  follows : 

Assets 

Cash  $14,000 

Notes  Receivable 15,000 

Accounts   Receivable $30,000 

Less  Reserve  for  Bad  Debts 5,000  25,000 

Mdse.    Inventory 20,000 

Furniture  and  Furnishings $  5,000 

Reserve  for  Depreciation 1,000  4,000 

Delivery  Equipment $  7,000 

Reserve  for  Depreciation 2,000  5,000 

Prepaid    Expenses 1,000 

Total  Assets $84,000 

Liabilities 

Notes  Payable  $10,000 

Trade  Acceptances   Payable 5,000 

Accounts  Payable 40,000 

Accrued    Expenses 5,000 

Total  Liabilities 60,000 

Proprietary  Interest 

A,  Capital  12,000 

B,  Capital  12,000 

Total  Proprietary   Interest $24,000 

They  agree  to  sell  C  a  one-fourth  interest  in  the  firm  for  a  sum  equal 
to  one-fourth  of  the  present  proprietary  interest  in  the  firm  plus  a  sum  for 
Good  Will  agreed  upon  as  one-half  the  average  of  the  last  three  years  net 
profits.  The  profits  for  these  years  are  $6,000,  $7,500,  and  $4,500  respectively. 
C  purchases  his  interest  equally  from  A  and  B. 

a.  Give  such  entries  as  may  be  necessary  to  record  the  sale  of  the  interest 
to  C,  as  well  as  the  payment  by  C. 

PROBLEM  46 

(Adapted  from  Institute  Examination,  June,  1917) 

The  partnership  of  A  and  B  have  the  following  statement  on  January  1, 
19—: 

Building    $15,000  Accounts  Payable $10,000 

Accounts  Receivable 12,000  Notes  Payable 5,000 

Cash 9,000  A  Investment 30,000 

Furniture  and  Fixtures 2,800  B  Investment 35,000 

Merchandise   37,000 

Other  Equipment 4,200 


$80,000  $80,000 

C  is  admitted  as  a  partner  at  the  close  of  the  year  under  the  following 
agreement : 

C  to  contribute  cash  $30,000  and  to  be  entitled  to  one-third  of  the  profits  of 
the  business  including  this  year.    The  following  changes  in  the  books  are  to  be 

54 


made,  the  losses  being  to  A  and  B's  investment  accounts;  the  building  to  be 
marked  down  5%,  a  Reserve  for  Bad  Debts  account  to  be  created  amounting 
to  2%  of  the  Accounts  Receivable  of  January  1,  19 — ,  the  Merchandise  In- 
ventory to  be  revalued  at  $35,000,  Furniture  and  Fixtures  to  be  revalued  at 
$2,500.  At  the  end  of  the  year  good  will  is  to  be  fixed  at  3  times  the  net  profits 
in  excess  of  $20,000  and  to  be  set  up  on  the  books  crediting  A  and  B  equally. 
A,  B  and  C  each  to  draw  $3,000  of  the  net  profits,  the  remaining  profits  to  be 
carried  to  their  investment  accounts. 

During  the  year  the  following  is  a  summary  of  the  transactions  that  took 
place : 

Merchandise  Purchases  ($240,000  on  credit) $265,000 

Sales   ($175,000  on  credit) 300,000 

Accounts  Payable  paid  (Face  $245,000—2%  discount) 240,100 

Accounts  Receivable  collected  (Face  $170,000,  net  except  $50,000  on 

which  2%  is  allowed) •. 169,000 

Trading  Expenses   31,500 

Administrative    Expenses 7,500 

Paid  cash  for  interest  on  Notes  Payable 250 

The  three  partners  each  withdraw  $3,000.00  as  agreed. 

In  closing  the  books  for  determining  the  profits  and  good  will  the  follow- 
ing facts  are  given : 

Merchandise   inventory    December   31,    19— $60,000 

Depreciation  on  Building 2% 

Additional  Reserve  for  Bad  Debts 165 

Reserve  for  Depreciation  on  Furnishings  and  Fixtures 200 

After  good  will  has  been  determined,  set  upon  the  books,  and  credited  to 
A  and  B,  C  then  contributes  enough  cash  so  that  his  Investment  account 
equals  one-third  of  the  total  investment. 

You  are  asked  to  do  the  following : 

1.  Give  a  journal  entry  showing  how  the  accounts  are  to  be  adjusted  as  per  the 
agreement. 

2.  Prepare  an  operating  statement  as  of  December  31,  19 — .   ^ 

3.  Figure  the  good  will  and  give  the  journal  entry. 

4.  Give  skeleton  account  of  (a)  the  investment  accounts  of  A,  B  and  C,  and  (b). 
Cash. 

5.  Prepare  a  financial  statement  as  of  December  31,  19 — . 

PROBLEM  47 

1.  A  and  B  are  partners  with  capitals  of  $20,000  and  $11,000,  respectively. 
It  is  agreed  that  a  third  party,  C,  shall  buy  a  one-third  interest  in  the  partner- 
ship, equally  from  A  and  B  upon  the  following  conditions :  The  fixed  assets 
are  to  be  valued  at  $4,000  less  than  the  figure  at  which  they  appear  in  the 
balance  sheet;  good  will  is  valued  at  $6,000.  Give  journal  entries  necessary 
to  give  eflFect  to  the  above  agreement. 

2.  A  and  B  are  partners  with  investments  of  $7,500  and  $5,000,  respec- 
tively. They  agree  to  take  in  C  as  a  partner  upon  the  following  conditions : 
Good  will  is  valued  as  two  years'  purchase  of  the  average  of  the  last  three 
years'  net  profits  which  were  $2,000,  $2,500  and  $2,700,  respectively.  C  is  to 
pay  in  cash  to  the  credit  of  the  firm  cash  sufficient  to  make  him  one-quarter 
interest  in  the  new  firm.    Give  the  journal  entries. 

3.  A  and  B  are  in  partnership  with  investments  of  $6,000  and  $4,000, 
respectively.  They  agree  to  take  in  C  as  an  equal  partner  in  the  business 
on  the  following  terms :    The  good  will  is  to  be  valued  at  two  years  of  pur- 

65 


chase  of  the  average  of  the  last  three  years'  profits,  which  were  $1,600,  $2,000 
and  $1,800,  respectively.  C  is  to  purchase  his  interest  equally  from  A  and  B 
and  is  to  pay  $5,000  for  it.    Give  the  journal  entries. 

Comment. — In  part  3,  C  is  to  have  a  one-third  interest  in  the  business  rather  than 
an  equal  interest.  The  important  point  to  these  problems  refers  to  the  price  paid  by 
the  incoming  partner.  Is  it  additional  capital  of  the  partnership  or  the  price  paid  to 
the  old  partners  individually  for  part  of  their  interest? 

PROBLEM  48 

1.  A  and  B  are  in  partnership,  having  investments  of  $12,000  and  $8,000, 
respectively,  and  sharing  profits  and  losses  in  the  proportion  of  75  per  cent, 
and  25  per  cent.,  respectively.  Interest  at  5  per  cent,  per  annum  is  allowed 
on  investments.  Give  the  journal  entry  which  adjusts  interest  between 
partners  without  use  of  Interest  or  Profit  and  Loss  accounts. 

2.  X  and  Y  entered  into  a  partnership  agreement  whereby  each  was  to 
receive  interest  at  5  per  cent,  on  the  excess  over  or  pay  interest  on  the  deficit 
under  the  agreed  investment  as  indicated  below.  Draft  journal  entry  to 
adjust  the  interest  between  the  partners  without  using  the  Interest  or  Profit 
and  Loss  accounts.  Profit  and  loss  is  to  be  shared  in  proportion  to  agreed 
contributions. 

X  Y 

Agreed    Investment $4,000.00        $2,000.00 

Actual  Investment 6,000.00  1,000.00 

3.  A  and  B  are  in  partnership,  A's  investment  being  $15,000  and  B's  is 
$12,000.  A  agreed  to  invest  $11,000  and  B  $18,000.  Interest  is  to  be  allowed 
on  excess  over  and  charged  on  deficit  under  agreed  contributions.  Make  a 
journal  entry  to  adjust  interest  between  partners  without  running  it  through 
the  Interest  and  Profit  and  Loss  accounts.  Profits  are  to  be  shared  according 
to  agreed  contributions. 

4.  A,  B  and  C  are  in  partnership  sharing  profits  in  the  proportions  of  Yz, 
Vs  and  Vq,  respectively.  Their  respective  investments  are  $20,000,  $18,000  and 
$15,000.  Interest  at  6  per  cent,  is  allowed  on  capital.  Give  the  journal  entry 
that  will  adjust  interest  without  use  of  an  interest  or  Profit  and  Loss  account. 

5.  A  and  B  agree  to  invest  $20,000  each  in  a  partnership,  but  the  actual 
investments  are  $15,000  and  $22,000  respectively.  Profits  and  losses  are  to  be 
shared  in  proportion  to  agreed  investments.  Interest  on  investment  at  6% 
is  to  be  allowed  on  the  excess  over  and  charged  on  the  deficit  under  the  agreed 
investments.  Give  the  entry  which  will  adjust  the  interest  directly  between 
the  partners'  accounts. 

Comment. — The  five  parts  of  this  problem  call  for  Journal  entries  to  adjust  interest 
between  partners.  The  directions  against  the  use  of  the  Interest  and  Profit  and  Loss 
Accounts  does  not  prevent  the  student  from  using  dummy  accounts  in  making  the 
calculation. 

PROBLEM  49 

(Adapted  from  English  Intermediate  Examinations,  November,  1908) 

I.  There  are  three  partners  in  a  trading  concern — X,  Y  and  Z — with  equal 
amounts  of  capital  in  the  business,  on  which  they  draw  interest  at  5  per  cent. 
The  net  profits  of  the  business,  before  charging  interest  on  capital,  amount 
to  20  per  cent,  on  such  capital.  The  net  profits,  after  charging  interest  on 
capital,  are  divided  as  follows:    X,  one-half;  Y,  one-third;  Z,  one-sixth.    Tak- 

6« 


ing  the  interest  and  the  net  profits  together,  prepare  accounts  showing  the 
respective  proportion  of  the  profit  to  be  credited  to  each  partner. 

II.  A  firm  of  three  partners,  G,  H  and  J,  who  were  interested  in  the  profits 
or  losses  of  their  general  business  in  the  proportions  of  40  per  cent.,  30  per 
cent,  and  30  per  cent.,  respectively,  entered,  at  the  instance  of  H,  into  two 
outside  ventures  on  the  understanding  that  if  a  profit  resulted  in  either  case, 
H's  proportion  thereof  should  exceed  his  usual  proportion  by  10  per  cent.,  and 
if,  on  the  other  hand,  a  loss  resulted  from  either  transaction,  H's  proportion 
thereof  should  exceed  his  usual  proportion  by  15  per  cent. 

Venture  No.  1  yielded  a  profit  of  $5,000.00. 

Venture  No.  2  resulted  in  a  loss  of  $2,500.00. 

The  ordinary  business  showed  a  profit  of  $10,000.00. 

Divide  up  the  results  in  the  manner  agreed,  and  show  their  effect  in  a 
personal  account  with  each  partner. 

Comment. — Part  I.  Probably  the  easiest  way  to  solve  this  problem  is  to  make  it 
concrete  by  assuming  a  definite  investment  of  some  amount  for  each  partner,  such  as 
$1,000.00.    The  total  investment  would  then  amount  to  $3,000.00. 

A  more  abstract  solution  would  begin  by  letting  each  man's  investment  be  repre- 
sented by  100%;  or  the  total  investment  could  be  100%  in  which  case  each  investment 
would  be  33y3%  of  the  total. 

Part  II.  The  statement  in  the  fifth  line  that  H's  proportion  should  exceed  his  usual 
proportion  by  10%  is  ambiguous.  It  might  mean  either  a  flat  10%  or  ten  per  cent  of 
his  usual  proportion.  The  latter  interpretation  would  result  in  a  comparatively  small 
increase.  Therefore  the  student  may  assume  that  a  flat  increase  of  10%  was  intended 
and  solve  the  problem  accordingly.  He  will  also  assume  that  the  15%  is  a  flat  increase. 
The  student  should  notice  that  any  increase  in  one  man's  proportion  of  profit  or  loss 
must  be  taken  from  the  other  two  proportions  in  their  profit  and  loss  sharing  ratio. 

PROBLEM  50 

(Adapted  from  English  Final  Examination,  May,  1907) 
A  and  B  are  partners,  sharing  profits  equally.  They  agree  to  dissolve 
partnership  on  December  31,  1906,  A  to  retire  from  the  concern  and  to  have, 
in  addition  to  his  capital  and  profits,  one-half  of  the  good  will  agreed  as  one 
year's  purchase  upon  an  average  of  the  past  three  years'  net  profits,  the  two 
preceding  years'  net  profits  being  $55,000  and  $52,500,  respectively. 

The  following  is  the  Trial  Balance  of  their  books  on  the  above  date : 

Stock,  1st  January $  41,500.00 

Goods  Purchased   245,000.00 

Goods  Sold  $313,000.00 

Discount  on  Sales 7,500.00 

Salaries  and  Wages 9,000.00 

Incidental   Expenses    1,500.00 

Stationery  and  Postage 500.00 

Banlc  Discount 100.00 

Fire  Insurance  100.00 

Bills  Receivable 14,700.00 

Bills  Payable   8,500.00 

Creditors    13,750.00 

Debtors 41,250.00 

Bank   8,925.00 

Cash  in  Hand 75.00 

Bad  Debts  1,100.00 

A'  Capital,  1st  January 32,500.00 

B's  Capital,  1st  January 19,500.00 

A's  Drawings  9,000.00 

B's  Drawings 7,000.00 

$387,250.00       $387,250.00 
6'? 


The  Stock  at  31st  of  December  was  $37,500. 

Allow  $1,000  as  discount  off  debtors  and  $500  discount  off  creditors,  charg- 
ing interest  at  5  per  cent,  upon  capital  and  drawings,  the  latter  being  by  equal 
installments  at  the  end  of  each  quarter,  and  prepare  Profit  and  Loss  account, 
partners'  Capital  accounts,  and  balance  sheet. 

Comment. — This  problem  illustrates  the  computing  of  a  value  for  good  will  and  for 
recording  interest  and  partners'  accounts.  Here  interest  is  charged  upon  partners' 
drawings  as  well  as  being  credited  upon  the  investment.  The  statement  that  drawings 
are  in  equal  installments  at  the  end  of  each  quarter  furnishes  the  time  basis  for  com- 
puting the  interest  on  drawings. 

The  discounts  on  debtors  and  creditors  accounts  to  be  considered  as  allowed  prior 
to  payment  is  unusual.  A  good  way  to  handle  these  items  is  to  set  up  a  reserve  for 
discount  on  debtors  and  a  reserve  for  discount  on  creditors.  The  former  will  be  a  credit 
account,  the  latter  a  debit  account. 

PROBLEM  51 

(Adapted  from  English  Final  Examinations,  December,  1900) 

Crank  and  Crane  carried  on  business  in  partnership,  and  divided  profits 
and  losses  in  proportion  to  their  capital,  three-fifths  and  two-fifths. 

On  January  1,  1900,  Crank's  capital  was  $52,000  and  Crane's  $35,000,  as 
shown  by  a  balance  sheet  of  that  date.  They  agreed  to  admit  Clark  as  a 
partner  from  the  same  date  on  the  following  terms : 

1.  The  assets,  liabilities  and  capital  to  be  taken  as  shown  in  the  balance 
sheet. 

2.  $12,500  to  be  added  to  the  assets  for  good  will. 

3.  The  amount  of  good  will  to  be  added  to  Crank's  and  Crane's  capital 
in  the  proportion  in  which  they  divide  profits, 

4.  Clark  to  pay  in  cash  to  the  credit  of  the  partnership  such  a  sum  as 
would  give  him  a  one-fifth  share  in  the  business. 

State  what  amount  of  capital  Clark  has  to  bring  in ;  set  up  the  Capital 
accounts  of  each  partner  in  the  new  partnership,  and  state  in  what  propor- 
tions the  profits  will  be  divided  in  the  future;  Crank  and  Crane,  as  between 
themselves,  sharing  in  the  same  proportions  as  before. 

PROBLEM  52 

(Adapted  from  English  Final  Examinations,  May,  1907) 
A  and  B  are  equal  partners,  and  their  balance  sheet  at  a  certain  date 
is  as  follows : 

Machinery  and   Plant $  6,250.00  Creditors   $10,000.00 

Horses  and  Wagons 1,250.00  A's   Capital 15,000.00 

Furniture  and  Fixtures 750.00  B's   Capital 15,000.00 

Stock    18,250.00 

Debtors    11,500.00 

Bank  1,500.00 

Cash   500.00 


$40,000.00  $40,000.00 

They  decide  to  admit  C  and  D,  the  former  to  provide  $15,000  as  his 
capital,  and  the  latter,  in  consideration  of  his  having  a  personal  business 
connection,  only  to  bring  in  $10,000,  but  his  Capital  account  to  be  credited 
with  the  same  amount  as  C's. 

C  and  D  only  accept  A  and  B's  balance  sheet  subject  to  -the  following 
alterations,  which  are  agreed  to : 

68 


Machinery  and  Plant  to  be  taken  at $  5,500.00 

Horses  and  Wagons 1,000.00 

Stock 16,500.00 

Debtors  to  be  subject  to  a  5  per  cent  discount. 
Creditors  to  be  subject  to  a  3  per  cent  discount. 
Adjust  the  accounts  and  prepare  commencing  balance  sheet  of  the  new 
firm. 

Comment. — Here  a  new  partner  enters  the  business  bringing  with  him  a  value  to 
be  capitalized  as  good  will.  In  most  of  the  former  problems  the  good  will  attaches  to 
old  partners. 

PROBLEM  53 

(Illinois,  May,  1914) 

A  and  B  ent-er  into  a  partnership  and  will  share  profits  in  the  proportions 
indicated  by  their  investments.  A  furnishes  $25,000,  and  B  furnishes  $15,000, 
which  is  invested  in  lands  and  buildings,  $10,000;  merchandise,  $30,000.  How- 
ever, before  they  have  actually  commenced  business,  C  realizing  that  A  and  B 
have  a  promising  venture,  offers  to  buy  one-third  interest  in  the  business  for 
$20,000.  A  agrees  to  sell,  provided  B  will  consent  to  pay  him  a  bonus  of  $4,000 
out  of  his  (B's)  share.  This  B  agrees  to  do,  and  consents  to  the  sale.  How 
should  the  $20,000  be  divided  between  A  and  B,  so  that  the  interest  of  all 
three  partners  will  be  equal? 

Comment. — It  is  to  be  kept  in  mind  that  C  is  buying  a  one-third  interest  from  the 
old  partners  in  such  proportions  that  the  interests  of  all  partners  wiil  be  equal  in  the 
end.  Also  note  that  the  mutual  agreement  between  A  and  B  to  sell  implies  that  the 
profit  made  oS  C  is  a  partnership  profit  to  be  divided  between  A  and  B  at  the  agreed 
rates. 

PROBLEM  54 

(Washington,  1917) 

Black  and  White  were  partners  upon  the  following  terms : 

1.  They  were  to  receive  5  per  cent,  interest  upon  their  respective  partner- 
ship capital, 

2.  They  were  to  receive  as  partnership  salaries  as  follows :  Black, 
$250.00  per  month  ;  White,  $100.00  per  month,  and  were  to  draw  no  further 
sums  pending  the  ascertainment  of  profits. 

3.  Depreciation  at  10  per  cent,  per  annum  to  be  written  oflf  Plant  and 
Machinery  as  standing  on  the  books  at  the  close  of  the  year. 

4.  Provision  at  5  per  cent,  (for  doubtful  accounts)  to  be  reserved  for  all 
accounts,  receivable,  not  including,  however,  bills  receivable. 

5.  The  net  profit  or  loss  to  be  shared  as  follows :  Black,  two-thirds ; 
White,  one-third. 

On  November  30,  1915,  the  following  was  the  trial  balance  of  the  firm's 
books,  which  were  kept  by  double  entry : 

Cr.  Dr. 

Partner's  Salary  Account $    3,850.00 

Purchases 127,310.00 

Investments  (at  cost) 6,150.00 

Wages 19,205.00 

John  Jones  &  Co 17,130.00 

Jas.  Smith  &  Son 35,695.00 

Wm.  Owen  18,120.00 

Legal   Expenses    70.00 

Cash   110.00 

Bank   6,025.00 

Real  Estate  103,205.00 

59 


Machinery  and  Plant 27,200.00 

Bills  Receivable 2,510.00 

Manager's  and  Clerks'  Salaries 4,725.00 

Office  Expense 540.00 

Discount    1,070.00 

Inventory,  January  1,  1915- 19,210.00 

Rent  (11  months) 3,300.00 

Albert  Black  (Capital  Account  on  Jan.  1,  1915) $  21,000.00 

Benjamin  White  (Capital  Account  on  Jan.  1,  1915)  7,500.00 

Dividends  Received  on  Investments ,  150.00 

Bills  Payable   19,075.00 

Sales    242,805.00 

Roberts  Brothers 41,215.00 

Robinson  &  Co 28,840.00 

J.  Green  &  Son 34,840.00 


$395,425.00        $395,425.00" 

Amend  the  foregoing-  balances  so  far  as  may  be  necessary  by  posting 
the  following  transactions  for  the  month  of  December,  1915 : 

Dec.    2.  Purchased  from  Roberts  Bros,  (on  credit) $39,205.00 

"      8.  Paid  Taxes  705.00 

9.  Paid  Robinson  &  Co.  (after  deducting  discount  of  $60.00) 1,200.00 

10.  Paid  Bill  Payable  to  H.  Brown  &  Co 500.00 

11.  Received  from  J.  Smith  &  Co.  (less  discount  of  $210.00) 4,740.00 

12.  Sold  Wm.  Owen  (on  credit) 5,000.00 

15.  Purchased  from  J.  Green  &  Son  (on  credit) 17,105.00 

16.  Bought  Gas  Engine  from  Al-Ki  Gas  Engine  Co.  (on  credit) 1,750.00 

17.  Paid  Wages  2,210.00 

21.  Paid  Taxes 105.00 

24.  Paid  Premium  on  fire  Insurance  Policy  for  Year  Ending  December 

24,  1916 525.00 

30.  Received  for  Sale  of  Investments 6,000.00 

31.  Paid  Office  Salaries 1,800.00 

Paid  Office  Expenses 100.00 

Paid  Wages  2,200.00 

Sold  James  Smith  &  Co.  (on  credit) 5,245.00 

All  of  the  above  payments  were  made  by  check  and  all  amounts  received 
were  paid  into  the  bank  upon  receipt.  The  stock  on  hand  on  December  31, 
1915,  was  agreed  by  the  partners  as  worth  $17,000.00.  The  outstanding  rent 
due  to  Benjamin  &  Lewis  for  December,  $300.00,  and  the  partners  drawings 
for  the  same  month  must  be  provided  for.  After  making  all  adjustments 
provided  for  in  the  clauses  of  the  partnership  agreement,  balance  the  books 
as  at  December  31,  1915,  and  prepare  trial  balance.  Make  up  a  profit  and 
loss  account  divided  into  the  proper  trading  and  general  sections.  Close  this 
by  dividing  the  net  profits  between  the  partners  in  the  proper  proportions  and 
prepare  a  balance  sheet. 

Comment. — A  working  sheet  should  be  used  for  the  solution  of  this  problem.  The 
transactions  for  December  are  to  be  recorded  in  the  adjustment  columns  and  entries 
made  also  for  the  notations.  Then  a  new  trial  balance  might  be  placed  in  the  fifth 
and  sixth  columns  of  the  working  sheet  if  desired.  That  would  leave  two  columns  for 
Manufacturing  and  two  for  the  other  profit  and  loss  items,  (Trading,  Administration, 
and  Financial).  If  the  new  trial  balance  is  not  taken  the  extra  columns  should  be  used 
for  Trading  as  usual. 

PROBLEM  55 
(English  Intermediate  Examination,  May,  1911) 

Brown  and  Smith  are  partners.    The  partnership  deed  provides  inter  alia : 
1.     That  the  accounts  be  balanced  on  31st  of  December  in  each  year. 

60 


2.  That  the  profits  be  divided  as  follows:  Brown,  one-half;  Smith,  one- 
third,  and  carried  to  a  Reserve  Account  one-sixth. 

3.  That  in  event  of  the  death  of  a  partner,  his  executors  be  entitled 
to  be  paid  out : 

a.  The  capital  to  his  credit  at  date  of  death. 

b.  His  proportion  of  reserve  at  date  of  last  Balance  Sheet. 

c.  His  proportion  of  profits  to  date  of  death  based  on  the  average  profits 
of  the  last  three  completed  years. 

d.  By  way  of  good  will  his  proportion  of  the  total  profits  for  the  three 
preceding  years. 

On  the  31st  of  December,  1909,  the  Ledger  Balances  were: 

Brown's  Capital $  9,000.00 

Smith's   Capital    6,000.00 

Reserve 3,000.00 

Creditors    3,000.00 

Bills  Receivable  $  2,000.00 

Investments 5,000.00 

Cash 14,000.00 

$21,000.00        $21,000.00 
The  profits  for  the  three  years  were : 

1907  $4,200.00 

1908  3,900.00 

1909  4,500.00 

Smith  dies  May  1,   1910.     Show  the     account  as  between     the  firm  and 
Smith's  executors  on  May  1,  1910. 

Comment. — The  point  to  this  problem  is  based  upon  the  principle  that  a  reserve 
which  is  set  up  for  any  purpose  other  than  to  record  a  loss  realized  or  certain  to  be 
realized,  is  appropriated  surplus.  This  reserve,  then,  is  a  part  of  the  profit  and  the 
partners  have  the  same  relative  interests  in  it  that  they  have  in  the  other  five-sixths  of 
the  profit.    What  are  the  relative  shares  of  the  partners  in  the  profits  which  are  divided-* 

PROBLEM  56 

(Adapted  from  English  Intermediate  Examination,  May,  1908) 

Aird  and  Batty  have  each  carried  on  a  prosperous  business,  which  they 
decide  to  combine  and  convert  into  a  Corporation,  transferring  the  assets  at 
book  values,  and  adding  for  good  will  a  sum  equal  to  four  years'  purchase  of 
the  combined  net  profits  of  the  two  concerns  based  on  the  average  of  the 
preceding  years. 

The  sum  so  ascertained  for  good  will  is  to  be  divided  as  follows:  Aird, 
two-thirds,  and  Batty,  one-third. 

The  three  years'  profits  were :    Aird  $48,315  and  Batty  $37,950. 

The  assets  taken  over  by  the  Company,  viz.  Land,  Buildings,  Plant. 
Machinery.  Patterns,  Stock,  and  Debtors,  amount  to :  Aird  $157,280  and 
Batty  $59,040. 

The  purchase  money  is  payable  as  follows :  Fully-paid  preferred  stock 
and  cash,  in  equal  proportions,  to  represent  the  above  assets. 

Fully-paid  common  stock  to  represent  the  value  of  good  will. 

Show  the  amounts  receivable  by  each  of  the  vendors  in  preferred  stock, 
in  common  stock,  and  in  cash. 

PROBLEM  57 

(Wisconsin,  1916) 
A,  B  and  C  are  in  partnership.     A  invested  $11,000;  B  invested  $5,000; 

61 


and  C  invested  $1,200.  Their  agreement  provides  that  profits  or  losses  shall 
be  divided  as  follows  : 

A,  4/9;  B,  3/9;  C,  2/9. 

The  partnership  has  become  insolvent  and  has  therefore  decided  to  dis- 
solve. The  cash  value  of  assets  is  $10,000.  The  deficit  is,  therefore,  $7,200. 
How  should  the  assets  be  divided  and  how  much  money  will  each  partner 
receive? 

Comment. — This  is  a  problem  in  the  distribution  of  assets  upon  dissolution.  Assets 
are  never  distributed  in  the  profit  and  loss  sharing  ratios  as  such.  Show  by  jpiirnal 
entry  the  relation  of  the  partners  after  the  distribution.  Remember  that  losses  are 
distributed  before  assets. 

PROBLEM  58 

(Illinois,  May,   1910) 

A,  B  and  C  engage  in  business,  A  contributing  $10,000  capital ;  B,  $5,000, 
and  C  undertakes  to  take  the  active  management  at  a  salary  of  $3,000  a  year, 
to  be  paid  to  him  monthly.  After  providing  5  per  cent,  interest  on  capital 
they  are  to  divide  the  net  results  in  the  proportions  of  5,  3  and  2.  At  the 
end  of  18  months  they  ascertain  the  position  to  be  unfavorable  and  decide 
to  wind  up.  The  assets  are  agreed  to  be  worth  $12,500,  of  which  A  takes 
$10,000  and  B  $2,500.  There  are  no  liabilities  except  for  the  capital  and 
simple  interest  thereon,  and  one  month's  salary  due  C.  State  the  position 
of  the  three  partners  to  each  other. 

PROBLEM  59 

(Illinois,  November,  1908) 

A,  B  and  C  were  partners  and  contributed  the  following  capital :  A 
$8,000,  B  $6,000  and  C  $4,000.  Profits  and  losses  were  to  be  borne  equally. 
At  the  end  of  4;he  first  year  each  partner  had  drawn  $1,000.  The  assets  were 
then  disposed  of  for  $3,000,  the  purchaser  discharging  all  liabihties  of  the 
firm.  How  should  this  sum  of  $3,000  be  apportioned  among  the  partners  and 
would  any  of  them  have  to  advance  any  further  sum?  If  so,  state  which 
partner  and  how  much  and  make  up  the  necessary  accounts  to  show  the 
results. 

PROBLEM  60 

(Adapted  from  Illinois,  May,  1912) 

A  partnership  between  three  persons  had  run  for  three  years  upon  the 
following  capital  and  interest  in  profits : 

A  $9,000.00 H  Interest 

B    8,250.00 H  Interest 

C    2,000.00 H  Interest 

The  annual  profits,  which  had  been  credited  to  the  partners'  drawing 
accounts,  were  as  follows : 

1918   $30,510.75 

1919   29,026.30 

1920  37,026.72 

Each  partner  had,  during  the  three  vears,  withdrawn  cash  to  the  amount 
of  $15,000. 

On  December  31,  1920,  C  expressed  his  dissatisfaction  and  announced  his 

62 


intention  of  dissolving  the  agreement,  so  far  as  He  was  concerned,  unless  he 
was  placed  in  the  same  position  as  to  profits  as  A  and  B,  dating  back  to 
January  1,  1920. 

A  and  B  agree  to  this,  provided  C  will  agree  to  a  transfer  from  his  Draw- 
ing Account  of  a  sum  sufficient  to  equalize  the  Capital  Accounts.  This  is 
accepted  by  C  provided,  however,  that  A  and  B  reduce  their  Capital  Accounts 
to  $6,750  each,  and  provided  also  that  the  aggregate  stated  profits  are  revised 
by  setting  up  a  Reserve  for  Depreciation  of  Office  Furniture  of  v$l,200. 

Assuming  the  books  to  have  been  closed  each  year  under  the  original 
terms  of  agreement,  draft  the  journal  entries  necessary  to  adjust  the  accounts 
and  show  the  relative  condition  of  the  respective  Capital  and  Drawing 
Accounts  at  the  opening  of  the  new  partnership,  January  1,  1921. 

PROBLEM  61 
(Adapted  from  Illinois,  December,  1910) 

A  and  B  agree  to  dissolve  partnership  December  31,  1920,  at  the  close 
of  their  first  year's  business.    Their  financial  statement  is  as  follows : 

Assets 

Merchandise   $  57,500.00 

Furniture  and  Fixtures 2,000.00 

Accounts  Receivable 85,500.00 

Notes  Receivable  (Discounted) 14,000.00 

'      Good  Will  5,000.00 

Total  $164,000.00 

Liabilities  and  Proprietary  Interest 

Accounts  Payable   $  50,000.00 

Notes  Payable— Bank 2,500.00 

Notes  Payable— Trade    1 1,500.00 

Notes  Receivable  (Discounted) 14,000.00 

Capital  Accounts: 

A $53,500.00 

B  17,500.00  71,000.00 

Profit,  1920 15,000.00 

Total  $164,000.00 

Profits  are  divisible,  A  2/3,  and  B  1/3.  Six  per  cent,  interest  which  is 
allowed  on  capital  has  not  been  considered  for  the  current  year.  There  are 
no  interest  charges  on  drawings,  which  are  upon  the  basis  of  $2,500  each.  Each 
partner  has.  during  the  year,  drawn  out  the  full  amount  allowed  him  by  this 
provision. 

A  is  to  continue  the  business  and  assume  all  liabilities.  B  opening  up 
business  elsewhere  is  to  take  one-fourth  of  the  stock  and  agrees  to  leave  in  the 
business  $2,500  as  guarantee  for  one  year  against  floating  liability  for  bad 
debts  and  discounted  merchandise  notes.  At  the  end  of  the  year  any  balance 
is  to  be  settled  in  cash. 

Prepare  journal  entries  to  record  the  above  transactions,  and  A's 
financial  statement  after  dissolution  expressive  of  the  terms  stated. 

PROBLEM  62 
(Adapted  from  Institute,  June,  1917) 
A,  B  and  C  formed  a  partnership.     A  agreed  to  furnish  $10.0(X),  B  and  C 
each  $7,000.     A  was  to  manage  the  business  and  to  share  one-half  of  the 


profits  and  losses;  B  and  Cwere  each  to  share  one-fourth.  The  partners  are 
to  be  charged  with  interest-  on  the  amounts  under  and  credited  with  the 
amounts  over  their  agreed  investments. 

A  actually  furnished  merchandise  worth  $8,500,  but  no  additional  cash. 
B  actually  furnished  in  cash  $9,000,  and  C,  $5,500. 

As  manager  of  the  business  A  purchased  additional  merchandise  amount- 
ing altogether  to  $75,000.  Sales  amounted  to  $100,000.  Accounts  receivable 
amounted  to  $80,000.  Accounts  payable  paid  amounted  to  $73,500.  Expenses 
incurred  amounted  to  $2,900  of  which  $2,400  had  been  paid. 

It  is  decided  to  close  out  the  business.  $4,500  of  the  accounts  receivable 
is  collected,  the  balance  prove  worthless.  The  accounts  payable  are  paid. 
The  merchandise  is  inventoried  at  $500  and  this  amount  is  realized  on  sale. 

a.  Prepare  skeleton  ledger  accounts  showing  above  transactions.  Close 
the  accounts  and  show  the  operating  profit  or  loss  for  the  period. 

b.  Adjust  the  interest  directly  between  the  partners. 

c.  Divide  the  net  profit  or  loss  in  the  agreed  ratio  between  the  partners. 

d.  Then  (1)  indicate  the  final  adjustment  in  closing  the  partnership 
affairs.  (2)  If  A  defaults  in  accounting  for  the  partnership  funds  and  this 
proves  to  be  worthless  since  A  has  no  assets,  show  the  modification  in  the 
final  adjustment. 


PROBLEM  63 

(Adapted  from  Illinois,  May,  1910) 

A  and  B,  who  are  equal  partners  in  a  trading  firm,  decide  to  dissolve  their 
business.  The  following  financial  statement  was  prepared  at  the  close  of  the 
year  immediately  prior  to  the  dissolution : 

FINANCIAL  STATEMENT 

Assets 

Cash $     500.00 

Accounts  Receivable   9,500.00 

Merchandise    5,500.00 

Building  and  Fixtures 10,000.00 

Machinery   7,500.00 

Good  Will  2,500.00 

Total $35,500.00 

Liability  and  Proprietary  Interest 

Accounts  Payable  $13,750.00 

Reserve  for  Doubtful  Accounts 750.00 

Capital  Accounts: 

A $12,500.00 

B  6,000.00  18,500.00 

Profit  and  Loss 2,500.00 

Total   $35,500.00 

The  following  assets  were  disposed  of  for  the  amounts  indicated : 

Accounts  Receivable $6,500.00 

Merchandise    5,750.00 

Machinery   2,500.00 

Building  and  Fixtures 4,000.00 

Prepare  statement  showing  the  realization  of  assets,  the  adjustment  of  the 
partnership  accounts,  and  the  distribution  of  the  funds. 

64 


PROBLEM  64 

(Wisconsin,  November,  1919) 

A,  B  and  C  were  partners  in  a  business  on  the  following  basis : 

Capital  Contributed       Shar«  of  Profit  Salaries 

A $45,000.00  50%  $6,000.00 

B  22,500.00  40%  4,000.00 

C 7,500.00  10%  2,400.00 

At  the  end  of  the  second  year's  business  A  died.  The  partners'  drawing 
accounts  before  crediting  their  year's  salaries  appeared  with  the  following 
debit  balances:    A,  $2,572.00;  B,  $1,218.00;  C,  $1,710.00. 

The  net  assets  of  the  business,  after  finally  closing  the  books,  were  found 
to  be  $74,780.00.  B  and  C  liquidate  the  afifairs  of  the  partnership.  Three 
distributions  of  the  proceeds  of  liquidation  were  made  as  follows:  $25,000.00, 
$35,000.00,  $11,780.00. 

You  are  asked  to  prepare  a  tabulation  showing  the  share  of  each  of  the 
distributions  to  each  of  the  partners. 

Comment. — The  liquidation  of  partnership  assets  by  installments  is  the  principal 
point  to  this  problem.  Shares  of  losses  should  be  distributed  before  attempting  to 
distribute  assets. 

To  protect  the  person  in  charge  of  the  liquidation  the  first  distribution  should  be 
made  in  such  a  manner  that  the  resulting  balances  in  the  investment  accounts  are  as 
nearly  as  possible  in  the  profit  and  loss  sharing  ratios.  In  this  problem  the  first  install- 
ment accomplishes  that  purpose. 


PROBLEM    65 

(New  York,  January,  1915) 
On  June  30,  1913,  X  and  Y,  partners,  operating  a  manufacturing  plant, 
incorporated  under  the  laws  of  the  state  of  New  York  as  the  X  and  Y  Manu- 
facturing Company  with  an  authorized  capital  of  $500,000.  The  corporation 
purchased  all  of  the  assets  and  assumed  all  of  the  liabilities  of  the  partnership 
as  set  forth  in  a  balance  sheet  dated  June  30,  1913,  giving  as  consideration  its 
entire  issue  of  capital  stock,  which  stock  was  all  taken  by  X  and  Y. 

BALANCE  SHEET,  JUNE  30,  1913 

Plant  and  Machinery $175,000.00 

Material  on  Hand,  per  Inventory 102,625.00 

Accounts  Receivable    113, 750.00 

Notes  Receivable    7,500.00 

Cash   32,125.00 

Total $431,000.00    * 

Liabilities 

X.  Capital    $240,000.00 

Y,  Capital   160.000.00 

Accounts  Payable   26.250.00 

Notes  Payable   3,500.00 

Wages  Due  and  Unpaid 1,250.00 

Total    $431,000.00 

The  change  in  organization  was  not  reflected  on  the  books  at  the  time 
of  incorporation,  but  at  the  close  of  the  first  fiscal  year  (June  30,  1914)  of 
the  corporation's  existence  the  condition  of  the  books  was  shown  by  the 
following  trial  balance : 

66 


TRIAL  BALANCE,  JUNE  30,  1914 

X,  Capital   $    240,000.00 

Y,  Capital 160,000.00 

Plant  and  Machinery $  187,500.00 

Material,  per  Inventory  June  30,  1913 102,625.00 

Sales 657,025.00 

Purchases    240,000.00 

Labor    172,500.00 

Office  Salaries   35,000.00 

Traveling  Expenses  12,000.00 

Interest 3,000.00 

Stationery  and  Printing 875.00 

Rent  and  Taxes 21,000.00 

Discount  and  Allowances 11,250.00 

Fuel   23,000.00 

Insurance    875.00 

Freight,  inward  8,750.00 

Commission    31,875.00 

Advertising   2,500.00 

Notes  Receivable 30,575.00 

Notes  Payable   5,500.00 

Accounts  Receivable    180,575.00 

Accounts  Payable  39,250.00 

Cash   37,875.00 

$1,101,775.00        $1,101,775.00 

Depreciation  on  plant  and  machinery,  5  per  cent. ;  unexpired  insurance, 
$375;  bad  debts,  $1,625;  inventory  of  material  on  hand  June  30,  1914,  $98,025. 

Make  such  entries  as  would  convert  the  partnership  books  into  those  of 
the  corporation,  and  prepare  a  statement  of  income  and  profit  and  loss  for 
the  year  July  1,  1913,  to  June  30,  1914,  and  a  balance  sheet  as  of  June  30,  1914. 

Comment. — There  are  two  parts  to  this  problem:  First  the  journal  entries  neces- 
sary to  convert  the  partnership  books  into  those  of  the  corporation.  The  disposition  of 
good  will  valued  at  the  difference  between  the  net  assets  of  the  partnership  and  the 
total  stock  issued  needs  careful  attention. 

The  second  part  of  the  problem  calls  for  the  usual  operating  and  financial  state- 
ments, of  li.e  corporation. 

PROBLEM  66 
(Ohio,  November,  1913) 

The  Unique  Manufacturing  Company,  a  corporation,  was  organized  July 
1,  1913.  with  an  authorized  capital  stock  of  $215,000.  par  value  of  shares,  $100 
each,  for  the  purpose  of  manufacturing  novelties.  The  five  incorporators 
subscribed  and  paid  for  five  shares  each,  organization  expenses  were  incurred 
to  the  amount  of  $5,000  and  paid  for  in  stock,  and  the  balance  of  the  stock 
was  disposed  of  on  the  following  conditions :  Ten  per  cent,  upon  subscription, 
and  three  equal  calls  for  the  balance  at  30,  60  and  90  days. 

On  July  31  The  Unique  Manufacturing  Company  secured  an  option 
for  thirty  days  on  the  plant  of  A  and  B,  for  $10,000,  agreeing  to  take  over  the 
assets  exclusive  of  cash,  and  assume  the  liabilities  of  the  partnership,  as  at 
July  31,  for  the  sum  of  $200,000,  payable  $90,000  immediately  after  taking 
over  the  business,  and  the  balance  in  90  days.  At  the  expiration  of  the  option, 
the  corporation  took  over  the  plant  as  agreed. 

The  following  is  a  transcript  of  A  and  B's  ledger  balances  as  at  July  31, 
1913: 

Land   $30,000.00 

Buildings  35,000.00 

Machinery 20,000.00 

Furniture  and   Fixtures 5,000.00 

Raw    Material 10,000.00 

fi6 


Tools 2,500.00 

Finished  Goods 10,000.00 

Work  in  Process 5,000.00 

Supplies 7,500.00 

Accounts  Receivable   25,000.00 

Cash    8,200.00 

Mortgage  on   Buildings 10,000.00 

Reserve  for  Depreciation — Machinery 2,500.00 

Reserve  for  Bad  Debts 1,000.00 

Accounts  Payable 15,000.00 

"A"    77,820.00 

"B"    51,880.00 

During  the  interval  A  and  B,  with  the  consent  of  the  corporation,  had  sold 
finished  goods  for  $5,000,  which  was  25  per  cent,  above  cost. 

The  subscription  to  the  stock  of  the  corporation  were  met  on  call  with 
the  exception  that  on  the  second  call  a  subscriber  for  twenty-five  shares  noti- 
fied the  corporation  that  he  was  unable  to  complete  his  agreement,  and  he 
was  released  without  further  liability.  The  forfeited  stock  was  sold  for  cash, 
at  par. 

From  the  foregoing,  draft : 

a.  Journal  entries  necessary  to  close  the  books  of  the  partnership. 

b.  To  open  the  books  of  the  corporation  and  to  show  all  transactions 
on  The  Unique  Company's  books. 

c.  Balance  Sheet  of  The  Unique  Manufacturing  Company,  September 
1,  1913. 

Comment. — This  is  the  first  problem  in  this  set  involving  an  option.  Usually  option 
agreements  provide  that  any  amount  paid  for  option  is  to  apply  on  the  purchase  price 
if  the  purchase  is  made.     Such  a  contract  should  be  assumed  in  this  problem. 

The  sale  during  the  option  period  of  $5,000  at  a  profit  of  25%  above  cost,  amounts 
to  a  payment  on  the  purchase  price  equal  to  the  profit. 

A  new  set  of  books  is  to  be  opened  and  the  old  books  are  to  be  closed.  In  this 
respect  it  is  different  from  the  foregoing  problem  where  the  old  books  were  converted 
into  corporation  books. 

PROBLEM  67 
(Washington,  1908) 

A  and  B  were  partners  trading  under  the  name  of  A.  B  &  Co.  Jwne  30. 
1908,  the  following  balances  appear  on  their  ledger: 

A.  Capital  Account $70,000.00 

B.  Capital   Account 50,000.00 

Real   Estate    22.000.00 

Buildings   •  ■ 20,000.00 

Machinery  and  Tools 44,000.00 

Furniture  and  Fixtures 2,000.00 

Accounts  Receivable   50,000.00 

Cash 7,000.00 

Materials   and   Merchandise 53,000.00 

Accounts  Payable 35,000.00 

Bills  Payable 48,000.00 

Bills   Receivable    5,000.00 

On  June  30.  1908.  the  business  is  incorporated  as  the  X  Company,  on  the 
following  plan : 

1.  Capital  Stock.  $150,000.00. 

2.  X  Co.  takes  over  entire  assets  and  liabilities  of  A,  B  &  Co.  at  the  book 
figures  as  above,  except  (a)  real  estate  of  the  book  value  of  $5,000,  which  is 
retained  by  A.  B  &  Co. ;  (b)  the  accounts  receivable,  which  are  taken  over  at 
$48,000  and  (c)  the  capital  accounts  of  the  partners. 

67 


3.  X  Co.  pay  A,  B  &  Co.  $30,000  for  the  good  will  of  the  business. 

4.  Payments  to  A,  B  &  Co.  are  made  as  follows,  viz.,  $50,000  in  first 
mortgage  bonds,  and  the  balance  in  capital  stock  of  the  X  Company. 

5.  After  paying  off  A,  B  &  Co.  the  remainder  of  the  capital  stock  is  sold 
for  cash  to  sundry  persons. 

The  real  estate  which  is  retained  by  A,  B  &  Co.  is  bought  from  A,  B  & 
Co.  by  A  for  $7,000  and  is  charged  to  A's  capital  account. 

After  the  conclusion  of  the  foregoing  described  transactions  A  and  B 
dissolve  partnership. 

You  are  required : 

a.  To  prepare  closing  entries  for  the  books  of  A,  B  &  Co. 

b.  A  statement  setting  forth  the  partners'  accounts  down  to  their  final 
closing,  beginning  with  the  balances  shown  by  the  books  on  June  30,  1908. 

c.  Opening  entries  for  the  X  Company. 

Comment. — This  is  another  problem  illustrating  the  accounting  for  the  conversion 
of  a  partnership  into  a  corporation.  Two  points  needing  special  attention  are  the 
good  will  and  the  profit  on  the  sale  of  the  real  estate  to  a  partner.  The  student  should 
be  able  to  account  for  the  good  will  by  recording  it  on  both  the  partnership  books  and 
the  corporation  ))Ooks  or  only  on  the  corporation  books.  The  transfer  to  the  corpora- 
tion of  part  of  the  assets  and  the  liabilities  does  not  close  the  partnership  books  because 
the  real  estate  is  sold  to  a  partner.  The  profit  on  the  real  estate  sale  must  appear 
distributed  on  the  partnership  books,  but  the  profit  on  account  of  the  good  will  may  or 
may  not  appear  on  the  old  books  because  it  will  be  sold  to  the  corporation  and  paid  for 
in  capital  stock. 

PROBLEM  68 

(Adapted  from  Ohio,  1918) 

B.  Sharp  and  R.  Wise,  partners,  for  several  years  conducted  a  manufac- 
turing business  under  the  firm  name,  Sharp  and  Wise.  The  business  having 
grown  to  such  an  extent  that  incorporation  was  deemed  advisable,  a  corpora- 
tion known  as  the  Sharp-Wise  Company,  with  an  authorized  capital  stock  of 
$200,0C0.C0  common  and  $200,000.00  preferred,  was  formed  to  take  over  the 
business. 

It  was  arranged  that  the  corporation  assume  control  on  January  1,  1922. 
The  following  trial  balance  was  taken  from  the  books  of  the  partnership  as 
at  the  close  of  business,  December  31,  1921,  after  closing: 

SHARP  AND  WISE 
Post  Closing  Trial  Balance  as  at  December  31,  1921 

Cash    $    8,500.00 

Accounts  Receivable 90,000.00 

Notes  Receivable 20,000.00 

Inventory— Raw   Material 104,000.00 

Inventory — Goods  in  Proc 32,500.00 

Inventory— Finished   Goods 19,000.00 

Machinery  and  Tools. 50,000.00 

Reserve  for  Depreciation $  15.000.00 

Horses  and  Wagons 2,500.00 

Reserve  for  Depreciation 900.00 

Fixtures   3,000.00 

Buildings  75,000.00 

Reserve   for   Depreciation 6,700  00 

Real    Estate— Land 25,000.00 

Accounts    Payable 72,000-00 

Notes  Payable 18,000.00 

Mortgages  Payable 30,000.00 

B.  Sharp— Capital 145,000.00 

R.  Wise— Capital 141,900.00 

$429,500.00        $429,500.00 
68 


It  was  agreed  that  the  corporation  should  take  over  all  of  the  assets, 
excepting  cash,  at  the  value  at  which  they  appeared  in  the  partnership  trial 
balance  of  December  31,  1921,  and  assume  the  liabilities.  The  partners  were 
to  receive,  in  consideration  for  the  business  the  entire  authorized  issue  of 
common  stock,  and  $118,400.00  par  value  of  the  preferred  stock  of  the  Sharp- 
Wise  Co. 

The  transfer  was  consummated  as  above  and  Sharp  was  elected  President 
and  General  Manager  and  Wise  Secretary-Treasurer  and  Office  Manager  of 
the  corporation,  the  former  at  a  salary  of  $6,000.00  per  year  and  the  latter  at  a 
salary  of  $5,000.00  per  year. 

On  the  morning  of  January  1,  1922,  $100,000.00  par  value  of  common  stock 
and  $59,200.00  par  value  of  preferred  stock  of  the  Sharp-Wise  Co.  was  issued 
and  delivered  to  each  of  them. 

Each  partner  then  withdrew  his  share  of  the  partnership  cash,  the 
amounts  being  charged  to  their  respective  drawing  accounts.  No  entry  was 
made  on  the  partnership  books  for  the  capital  stock  received  by  the  partners. 
It  should  here  be  noted  that  the  partnership  agreement  between  Sharp  and 
Wise  was  silent  as  to  the  ratio  in  which  profits  were  to  be  shared. 

No  new  books  were  provided  for  the  corporation.  Without  further  ad- 
justment, conversion  or  opening  entries,  the  current  transactions  of  the 
corporation  were  recorded  in  the  old  partnership  books  and  this  practice  was 
continued  throughout  the  year.  At  December  31,  1922,  the  trial  balance  taken 
off  by  the  bookkeeper,  before  closing  the  books,  was  as  follows: 

THE  SHARP-WISE  COMPANY 

Trial  Balance  as  at  December  31,  1922 

Cash    $  28,400.00 

Accounts    Receivable • 117,000.00 

Notes    Receivable 8,000.00 

Inventory— Raw  Material 104,000.00 

Inventory — Goods  in  Proc 32,500.00 

Inventory — Finished    Goods 19,000.00 

Liberty  Bonds  Held 50,000.00 

Furniture  and   Fixtures 3,500.00 

Machinery  and  Tools 67,800.00 

Reserve   for   Depreciation $      15,000.00 

Horses    and    Wagons 3,000.00 

Reserve  for  Depreciation 900.00                                               « 

Buildings 75,000.00 

Reserve   for   Depreciation 6,700.00 

Real    Estate 25,000.00 

Accounts    Payable 64,200.00                                               , 

Notes    Payable 7,500.00                                            \ 

Mortgages     Payable 30,000.00                                               ' 

Capital   Stock— Preferred 81,600-00 

B.  Sharp— Capital  Account 145,000.00 

R.  Wise— Capital  Account 141,900.00 

B.  Sharp— Drawing  Account 11,000.00 

R.    Wise— Drawing   Account 7,200.00 

Sales    739,100.00 

Cash   Discounts  Received 3,700.00 

Purchases— Raw  Materials 540,000.00 

Productive     Labor 95,000.00 

Non-Productive    Labor 10,000.00 

Fajctory   Repairs 1,500-00 

Power,    Light  and   Heat 2,200.00 

Taxes    3,000.00 

Insurance    800.00 

Salaries,  Superintendent  and  Foremen 7,000.00 

General    Factory    Expense 900.00 

69 


Advertising    1,200.00 

Commissions  on  Sales 6,000.00 

Office   Salaries 4,200.00 

Office    Expenses 2,500.00 

General    Expense 700.00 

Cash    Discount   Allowances 2,100.00 

Interest  Paid 1,600.00 

Dividends  Paid  on  Preferred  Stock 5,500.00 

$1,235,600.00        $1,235,600.00 

At  this  juncture  the  bookkeeper  declared  himself  hopelessly  confused  at 
the  condition  of  the  accounts  and  unable  to  proceed  with  the  closing  of  the 
books  or  the  preparation  of  financial  statements  for  the  corporation.  You 
were  called  upon  to  adjust  the  accounts  and  prepare  operating-  and  financial 
statements. 

Upon  your  advice  a  new  set  of  books  was  scoured  for  the  corporation. 
Proper  opening  entry  for  the  corporation  accounts  was  made  as  of  January 
1,  1922. 

Inasmuch  as  the  time  and  labor  required  to  transcribe  the  entries  for 
the  year  in  detail  would  have  been  {prohibitive  and  as  the  old  books  would 
still  be  on  file  for  reference  purposes,  you  decide  to  transfer  the  effects  of  the 
transactions  for  the  year  to  the  new  books  by  a  single  summary  entry. 

Upon  further  investigation  you  ascertained  the  following  facts  and  made 
the  necessary  adjustments  therefore  upon  the  new  corporation  books: 

The  inventories  as  at  December  31,   1922,  were  as  follows: 

Raw    Material $112,500.00 

Goods  in  Process 46,000.00 

Finished    Goods 27,500.00 

Interest  on  Notes  Payable  had  been  paid  for  the  year  and  interest  on  the 
Mortgage,  Payable  had  been  paid  to  September  1,  1922.  The  rate  on  both 
the  Notes  and  Mortgage  was  6%  per  annum. 

Messrs.  Sharp  and  Wise  had,  from  time  to  time  during  the  year,  drawn 
various  amounts  of  cash  which  had  been  charged  to  their  respective  drawing 
accounts  but  neither  had  received  any  credit  for  salary. 

During  the  first  half  year  the  remainder  of  the  authorized  preferred  stock 
had  been  sold  for  cash  at  par  to  provide  working  capital. 

It  was  decided  to  charge  for  depreciation  on  Buildings  3%  ;  on  Machinery 
and  Tools,  10%  ;  and  on  Horses  and  Wagons,  20%,  calculations  to  be  based 
on  the  average  balance  of  each  account  for  the  year  which,  in  this  case,  you 
may  assume  to  be  one-half  the  sum  of  the  balances  at  January  1,  1922,  and 
December  31,  1922. 

The  preferred  stock  bears  7%  cumulative  dividends  payable  January  1 
and  July  1.  The  July  1,  1922  dividends  were  paid  on  that  date  but  the  divi- 
dend for  the  last  half  year  was  not  declared  and  paid  until  January  2,  1923. 

No  other  adjustments  were  found  to  be  necessary. 

From  the  foregoing  data,  you  are  required  to  prepare  and  submit: 

(a)  The  entries  which  should  properly  have  been  made  on  the  books  of 
the  partnership  on  January  1,  1922.  to  record  the  sale  of  the  business  and  to 
open  up  the  necessary  accounts  for  the  corporation. 

(b)  Necessary  summary  entry  to  record  on  the  new  set  of  books  of  the 
corporation  as  at  December  31,  1922,  the  total  effect  of  the  transactions  for 
the  year  1922  as  recorded  in  detail  on  the  partnership  books. 

(c)  Financial  statement  and  operating  statement  of  the  Sharp-Wise  Com- 
pany for  the  year  ending  December  31,  1922. 

70 


PROBLEM  69 
(Iowa,  1918) 

A  corporation,  incorporated  under  the  laws  of  the  State  of  South  Dakota 
with  an  authorized  capitalization  of  $2,000,000.00  ($1,000,000.00  common, 
$1,000,000.00  preferred)  offers  stock  for  subscription  under  the  following  terms 
and  conditions : 

The  sale  of  shares  of  preferred  stock,  par  value  $100.00,  at  a  discount  of 
25  per  cent.,  payable  in  five  installments.  To  each  purchaser  of  preferred 
stock  shall  be  donated  one  share  of  common  stock,  par  value  $100.00. 

At  the  end  of  the  year  it  was  found  that  money  had  been  received  from 
installments  paid  on  subscriptions  to  preferred  stock  as  follows : 

First    Installments $120,750.00 

Second   Installments 96,600.00 

Third   Installments 96,600.00 

Fourth    Installments 96,600.00 

Fifth    Installments 96,600.00 

The  organizer  of  the  corporation  had  purchased  a  vacant  building  and 
real  estate  suitable  for  the  factory  site,  paying  therefor  $27,500.00.  The  prop- 
erty purchased  was  appraised  by  disinterested  appraisers  and  valued  con- 
servatively at  $45,000.00. 

The  owner  (organizer)  then  turned  the  said  property  over  to  the  corpora- 
tion at  the  appraised  value,  viz.,  $45,000.00,  and  received  therefor  preferred 
stock  at  same  price  as  subscribers,  which  was  at  25  per  cent,  discount,  and 
also  received  one  share  of  common  stock  (donated)  for  each  share  of  pre- 
ferred stock. 

The  expenses  of  organization  and  sale  of  stock  at  the  end  of  the  year  was 
found  to  be  as  follows  : 

Commissions   on   Sale   of  Stock $10,000.00 

Office  Expenses,  Clerk  Hire,  Heat  and  Light,  Stationery  and  other 

Expenses  3,000.00 

Appraisal   250.00 

Betterments  and   Remodeling   Building   for   Occupancy 2,000.00 

Draw  up  statement  showing  the  condition  of  organization,  using  receipts 
and  disbursements  as  above  and  showing  the  condition  of  stock  subscriptions 
and  stock  issue. 

Comment. — This  problem  illustrates  accounting  for  the  organization  of  a  corpora- 
tion in  which  promoter's  profits,  installment  payments  and  a  stock  bonus  are  the  prin- 
cipal features.  Attention  is  called  to  the  fact  that  the  laws  of  most  states  forbid  the 
issuing  of  capital  stock  at  a  discount.  The  problem  states  that  each  purchaser  of  pre- 
ferred stock  received  as  a  donation  one  share  of  common  stock.  The  assumption  is 
that  one  share  of  common  stock  was  donated  for  each  share  of  preferred  stock 
subscribed. 

PROBLEM  70 

(Wisconsin,  1917) 

Assume  that  the  Wisconsin  Motor  Company  was  incorporated  in  New 
York  on  January  2,  1917,  to  acquire  the  business  of  the  Wisconsin  Automo- 
bile Corporation.  The  authorized  capital  stock  of  the  Wisconsin  Motor  Com- 
pany is  $2,000,000  7  per  cent,  cumulative  preferred  and  600,000  shares  of  com- 
mon stock  of  no  specified  par  value. 

The  balance  sheets  of  the  Wisconsin  Automobile  Corporation  on  January 
I,  1917,  and  January  1,  1916,  were  as  follows: 

71 


Assets 

1917  1916 

Cash  on  Hand  and  on  Deposit $     564,747.00  $1,173,135.00 

Notes  and  Accounts  Receivable 2,873,383.00  1,049,005.00 

Investments    530,702.00  401,127.00 

Merchandise   Inventories •  5,860,948.00  3,327,301.00 

Real  Estate,   Buildings,  Machinery 3,184,278.00  2,215,831.00 

Goodwill    1.00  1.00 

Prepaid    Expenses 37,480.00  27,863.00 

$13,051,539.00  $8,194,263.00 

Liabilities 

1917  1916 

Notes   Payable $3,000,000.00  $    250,000.00 

Accounts    Payable 1,040,799.00  437,283.00 

Dealers'   Contract    Deposits 105,662.00  90,326.00 

Accrued  Accounts 243,821.00  73,969.00 

$4,390,282.00  $   851,578.00 

Proprietary  Interest 

1917  1916 

Preferred    Stock $1,400,000.00  $1,100,000.00 

Common    Stock 5,000,000.00  5,000,000.00 

Contingent    Reserve 136,783.00  145,764.00 

Surplus 2,124,474.00  1,096,921.00 

$8,661,257.00  $7,342,685.00 

The  preferred  stock  of  the  old  corporation  was  exchanged  for  the  full 
amount  of  the  preferred  stock  in  the  new  company.  Of  the  new  company's 
common  stock  200,000  shares  were  exchanged  for  the  common  stock  of  the 

old  corporation,  200,000  shares  were  unissued  at  the  present  and  the  remaining 
200,000  shares  were  offered  for  public  subscription  at  $35  per  share.  The 
transactions  in  this  portion  of  the  stock  are  as  follows: 

50,000  Shares  Sold  at  $32.00  Per  Share. 

100,000  Shares  Sold  at  $36.00  Per  Share. 

50,000  Shares  Sold  at  $34.00  Per  Share. 

The  new  company  expects  to  maintain  a  dividend  policy  on  common  stock 
at  $3  per  share  per  annum. 

You  are  asked  to  prepare : 

(a)  The  opening  balance  sheet  of  the  Wisconsin  Motor  Company,  as  of 

January  2,  1917,  assuming  that  the  common  shares  were  sold 
for  cash  on  that  day. 

(b)  What  is  the  book  value  of  a  share  of  common  stock  in  the  new 


company 


(c)  How  would  you  account  for  the  sale  of  stock  at  $32-$36  per  share  ? 

(d)  Prepare  a  comparative  statement  of  assets,  liabilities  and  proprie- 

tary interest  of  the  Wisconsin  Motor  Corporation  by  showing 
increases  or  decreases  for  each  of  the  items  listed. 

(e)  What  is  the  probable  cause  of  forming  the  new  company?    Of  in- 

corporating under  the  law  which  allows  capital  stock  of  no  par 
value  to  be  issued? 

Comment. — The  accounting  for  the  organization  of  a  corporation  involving  capital 
stock  of  no  par  value  is  illustrated  in  this  problem.  In  the  solution  it  should  be 
assumed  that  the  preferred  stock  is  preferred  as  to  both  dividends  and  assets.  Some- 
times when  book  value  of  stock  is  called  for,  good  v^^ill  is  intended  to  be  excluded  as 
being  an  asset  of  doubtful  value.  For  purposes  of  this  problem  include  good  will  in  the 
valuation  of  the  stock. 

72 


PROBLEM  71 
(Wisconsin,  November,  1919) 

On  January  1,  1919,  the  close  of  its  third  year's  business,  the  following  ac- 
counts were  open  upon  the  General  Ledger  of  the  Winner  Manufacturing 
Company : 

Preferred   Capital   Stock $   376,000.00 

Common  Capital  Stock 600,000.00 

Cash  on  Deposit $     50,000.00 

Imprest  Cash  Fund 500.00 

Real    Estate 250,000-00 

Buildings   300,000.00 

Notes  Receivable 8,000.00 

Factory  Equipment  450,000.00 

Accounts  Payable 53,000.00 

Notes  Payable  25,000.00 

Reserve  for  Depreciation,  Buildings 6,000.00 

Reserve  for  Depreciation,  Factory  Equipment.  75,000.00 

Accounts    Receivable 75,000.00 

Patents  1.00 

Patterns  25,000.00 

Auto  Trucks 10,000.00 

Bonds  Issued  200,000.00 

Premium  on  Bonds  Issued 2,000.00 

Inventory,  Raw  Material 180,000.00 

Inventory,    Finished    Goods 40,000.00 

Inventory,  Goods  in  Process 70,000.00 

Reserve  for  Depreciation,  Auto  Trucks 4,000.00 

Surplus,  January  1,  1918 50,000.00 

1918  Operating  Profit  and  Loss 67,501.00 

$1,458,501.00        $1,458,501.00 

The  preferred  capital  stock  was  $400,000.00,  7  per  cent,  cumulative,  and 
the  provisions  of  its  issue  require  that  3  per  cent,  of  the  authorized  amount 
be  set  aside  annually  as  a  sinking  fund  for  its  redemption  at  $125.00. 

The  common  capital  stock  of  the  company  is  without  par  value;  20,000 
shares  have  been  authorized ;  12,000  shares  issued. 

The  Real  Estate  account  is  found  to  consist  of  the  following  items : 

Factory  Real  Estate $  20,000.00 

Fertile  Farms  Investment 120,000.00 

City  Real  Estate  Investment 110,000.00 

The  bonds  of  the  company  are  twenty-year,  7  per  cent,  gold  bonds,  sold  on 
September  30,  1918,  for  101.  Interest  is  payable  October  1  and  April  1.  The 
bond  recital  provides  for  the  creation  of  a  pro-rata  sinking  fund  to  be  reserved 
out  of  the  profits  of  each  year  and  for  the  setting  aside  of  cash  equivalent  to 
such  reservation. 

The  income  taxes  for  the  year  are  estimated  at  $5,000.00. 

You  learn  that  the  directors  met  on  January  10,  1919,  and  declared  a  divi- 
dend of  7  per  cent,  upon  the  preferred  stock,  authorized  the  purchase  of  shares 
of  preferred  stock  in  accordance  with  the  terms  of  issue  and  declared  a  divi- 
dend of  two  dollars  ($2.00)  per  share  of  common  stock.  The  dividends  were 
paid  on  January  15,  1919,  and  the  preferred  stock  was  purchased  on  that  date. 

In  view  of  the  above  conditions,  you  are  asked  to  prepare  a  financial  state- 
ment of  the  Winner  Manufacturing  Company  as  of  January  1,  1919.  after  the 
books  for  the  year  have  been  closed  finally. 

Comment. — This  is  another  problem  in  capital  stock  of  no  par  value.  As  in  the 
above  problem,  assume  that  the  preferred  stock  is  preferred  as  to  both  dividends  and 

78 


itJ^T 


assets.  The  provision  for  a  sinking  fund  for  preferred  stock  is  the  first  encountered  in 
these  problems.  Notice  that  no  reserve  for  such  sinking  fund  is  called  for.  Should 
the  income  tax  be  used  in  determining  the  amount  of  the  net  profit? 

PROBLEM  72 
(Massachusetts,  October,  1914) 

A  client  submits  to  you  the  following  statement,  covering  a  period  of  ten 
years,  of  a  long-established  nut  and  bolt  business  which  he  contemplates 
purchasing : 

Sales— Averaging  Per  Year $300,000.00 

Wages— Averaging  Per  Year 100,000.00 

Expenses — Averaging  Per  Year 15,000.00 

Materials  Used — Averaging  Per  Year 115,000.00 

Real    Estate— Appraised   Value 50,000.00 

Machinery— Two  Years  Old  (Original  Cost) 20,000.00 

Machinery— Four  Years  Old  (Original  Cost) 10,000.00 

Machinery— Ten  Y^ears  Old  (Original  Cost) 20,000.00 

Materials  on  Hand 40,000.00 

From  the  above  figures  write  a  brief  report  to  submit  to  your  client,  set- 
ting forth  the  value  of  the  business,  including  good  will. 

Comment. — For  the  purposes  of  this  problem  on  good  will,  assume  that  it  is  to  be 
valued  at  three  years  purchase  of  the  average  of  the  last  ten  years.  Also  assume  that 
each  piece  of  machinery  less  than  ten  years  old  replaced  other  similar  machinery. 

PROBLEM  73 

(Adapted  from  the  Institute  Examination,  May,  1919) 

A  has  agreed  to  sell  to  B  the  Good  will  of  the  X.  Y.  Company  on  the  basis 
of  three  years'  profits  to  be  determined  by  you  on  sound  principles  of  account- 
ing as  accurately  as  possible  from  the  following  statement  handed  you  by  A. 
You  are  required  to  compute  the  value  of  the  Good  Will,  but  are  not  expected 
to  take  into  account  any  consideration  outside  those  presented  by  the  state- 
ments. 

Credits:  First  Year       Second  Year         Third  Year 

Sales    (selling  prices  substantially 

uniform  during  period) .....  .$638,400.00        $602,500.00         $    564,000.00 

Estimated    value    of    construction 
work  performed  and  charged 

to  property   1 10,000.00  77,600.00  154,000.00 

Appreciation   of   real   estate   upon 

revaluation  of  experts 80,000.00 

Profit  on  sale  of  Bethlehem  Steel 

Company  stock 85,000.00 

Inventory  at  end  of  period: 

Production  material  at  cost..     72,000.00  103,100.00  106,600.00 

Finished  goods  at  selling  prices     76,500.00  114,000.00  150,000.00 

$896,900.00  $977,200.00  $1,059,600.00 
Debits: 

Production  Materials  Purchased.. $233,000.00  $253,400.00  $   220,300.00 

Production  Labor 50,850.00  61,400.00  60,900.00 

Production  Expenses  Depreciation     66,750.00  69,300.00  70,300.00 

Selling  Expenses  52,500.00  55,650.00  62,800.00 

Interest 96,000.00  94,000.00  98,500.00 

Cost  of  Construction  Work 74,600.00  49,000.00  86,000.00 

Inventory  at  Beginning: 

Production  material  at  cost...     51,400.00  72,000.00  103,100.00 

Finished  goods  at  selling  prices     54,900.00  76,500.00  114000.00 

$680,000.00        $730,250.00         $   815,900.00 

Balance  being  profit  claimed  by  A. $316,900.00        $246,950.00         $    343,700.00 

74 


PROBLEM  74 

1.  From  the  data  given  below  state  clearly  and  explain  at  least  three 
different  methods  of  arriving  at  the  amount  to  charge  annually  for  the  depre- 
ciation of  any  one  or  all  of  the  following  items : 

Items                                               Value            Estimated  Life  Scrap  Value 

Buildings $50,000.00                50  years  $1,000.00 

Machinery 20,000.00                20  years  2,000.00 

Tools 5,000.00                 5  years  100.00 

Patterns 10,000.00                  3  years  100.00 

(Wisconsin,  1915) 

2.  The  A  Manufacturing  Company  has  four  general  types  of  depreciable 
assets : 

Rate  Cost  Scrap  Value 

Buildings 2%  $51,000.00  $1,000.00 

Machinery  A 10%  11,000.00  1,000.00 

Machinery  B  20%  12,000.00  2,000.00 

Office  Equipment 10%  4,100.00  100.00 

The  directors  desire  to  keep  but  one  Reserve  for  Depreciation  Account 
and  request  you  to  determine  the  composite  rate  which  may  be  used  in  deter- 
mining the  annual  depreciation  charge. 

Determine  the  composite  rate  as  requested,  tabulate  the  necessary  facts 
used  in  determining  it,  and  comment  upon  the  practicability  of  such  a  plan. 
(Wisconsin,  1919.) 

3.  (a)  Determine  the  average  life  of  the  following  fixed  assets  belonging 
to  the  Western  Hardware  Company : 

Estimated  Estimated 

Assets  Cost  Scrap  Value         Life  in  Years 

Buildings $200,000.00  $70,000.00  20 

Machinery 140,000.00  50,000.00  IS 

Tools 40,000.00  10,000.00  10 

•     Patterns 20,000.00  8 

(b)  After  determining  the  average  life  of  the  fixed  assets,  state  the 
amount  of  annual  depreciation  by  the  straight-line  or  fixed  proportion  method. 

4.  A  coal  company  owns  4,000  acres  of  coal  land  with  a  four-foot  seam 
of  workable  coal.  The  land  cost  $200.00  per  acre  and  the  company  has  spent 
$100,000.00  in  development,  equipment,  etc.  How  much  depreciation  should 
be  charged  against  each  ton  of  coal  mined? 

A  lumber  company  owns  a  3,000-acre  tract  of  timber  cruised  at  6,000  feet 
to  the  acre.  The  mill  and  timber  cost  $105,000.00.  The  salvage  value  of  the 
mill  is  estimated  at  $3,500.00  and  the  land  valued  at  $15,000.00.  How  much 
depreciation  should  each  one  thousand  feet  of  lumber  carry? 

A  coal  company  leases  land  in  which  they  are  to  pay  a  minimum  royalty 
of  $25,000.00  a  year.  Their  royalty  contract  is  based  on  a  production  of  ten 
cents  per  ton.  Any  year  that  the  royalty  does  not  amount  to  $25,000.00  they 
have  a  right  to  make  up  this  shortage  before  they  pay  more  than  the  mini- 
mum royalty  in  any  two  succeeding  years.  Explain  how  you  would  handle 
this  on  the  books  of  the  coal  company  so  that  the  royalty  account  would  show 
properly.  The  actual  royalty  for  the  first  vear  is  $20,000.00,  for  the  second 
year  $22,000.00  and  for  the  third  year  $30,000.00.  Prepare  the  journal  entry 
to  explain  your  answer. 

An  oil  company  owns  propertv  with  a  new  well  producing  100  barrels 
per  day.     This  property  cost  $50,000.00.     What  in  your  opinion  would  be  a 

•?6 


just  percentage  of  the  cost  of  the  leasehold  for  depreciation  for  the  first  year 
and  so  on  until  the  end  of  six  years?     (West  Virginia,  1917.) 

Comment. — Parts  1,  2,  and  3  of  this  problem  involve  the  computing  of  depreciation 
charges  by  various  methods  explained  in  the  lectures.  It  is  doubtful  if  the  composite 
life  plan  answers  the  requirements  of  the  Treasury  Department  for  Income  Tax  pur- 
poses. 

Part  4  is  a  series  of  problems  in  depletion  of  natural  resources  and  computation  of 
royalties  related  thereto.  It  is  not  necessary  to  set  up  a  reserve  for  depletion  since  a 
definite  portion  of  the  assets  have  disappeared. 

^  PROBLEM  75 

1.  A  manufacturing  concern  has  annually  for  the  past  six  years  made 
provision,  at  the  rate  of  10  per  cent,  per  annum,  for  depreciation  of  its  plant 
and  machinery,  crediting  the  amount  of  such  depreciation  to  a  suitable 
reserve  account.  During  the  year  an  engine  which  cost  originally  $5,000.00 
was  replaced  by  an  improved  engine  costing  $6,800.00.  The  cost  of  the  new 
engine  was  charged  to  Machinery  Account  at  time  of  purchase.  $300.00  was 
realized  from  the  salvage  of  the  old  engine,  this  amount  being  credited  to 
"Scrap  Sales"  when  received,  and  later  closed  to  Profit  and  Loss. 

Draft  the  adjustment  entries  which  you  consider  necessary  and  explain 
the  principle  upon  which  these  entries  are  based.     (Ohio,  1918.) 

2.  An  engine  installed  in  a  factory  January  1,  1914,  at  a  cost  of  $1,000.00 
is  replaced  by  one  of  larger  capacity  December  31,  1917,  costing  (second 
hand)  $2,800.00.  The  discarded  machine  was  sold  for  $900.00.  The  cost  of 
making  the  change  was  $200.00.  It  has  been  the  practice  of  the  company  to 
charge  off  10  per  cent,  depreciation  annually  (on  the  diminishing  basis)  carry- 
ing the  credit  to  a  Depreciation  Reserve  Account.  Make  the  necessary 
journal  entries.     (Illinois,  1918.) 

3.  A  machine  costing  $12,000.00  was  estimated  to  have  a  life  of  twelve 
years,  with  a  residual  value  of  $1,500.00.  At  the  close  of  each  year  a  charge 
of  $875.00  was  made  to  depreciation  and  a  like  amount  credited  to  "Reserve 
for  Depreciation."  Just  prior  to  closing  the  books  at  the  end  of  the  twelfth 
year  the  machine  was  discarded  and  sold  for  $2,000.00  (cash)  and  a  similar 
machine  was  bought,  costing  $16,000.00. 

Show  the  journal  entries  you  would  make  to  close  the  books  at  the  end  of 
the  twelve  years  in  order  to  close  these  transactions  and  to  make  necessary 
adjustments.     (Indiana,  1918.) 

4.  In  the  Machinery  Account  of  a  company  under  audit  you  find  the  fol- 
lowing : 

Balance  at  Beginning  of  Year $30,000.00 

Purchase  of  Two  Machines,  Type  A,  Including  Freight 6,000.00 

Cost  of  Removing  a  Discarded  Machine,  Type  B,  to  Make  Room 

for  New  Machine 125.00 

Cost  of  Installing  Two  New  Machines 200.00 

Alterations  to  4  Type  C  Machines,  Made  Necessary  by  Change  of 

Product 500.00 

Cost  of  Moving  Two  Machines  from  Building  A  to  Building  B  to 
Permit  of  More  Economical  Operation,  Including  Re- 
installation    205.00 

Sale  of  Old  Machine,  Type  A  (Less  Freight  and  Cost  of  Removal)  150.00 

Sale  of  Old  Type  B  Machine 1,100.00 

The  balance  of  the  Reserve  for  Depreciation  (Machinery)  Account  shows 
an  increase  for  the  year  of  the  year's  depreciation  charge  computed  at  the 
rate  of  6  per  cent,  on  the  balance  of  the  Machinery  Account  at  the  beginning 
of  the  year. 

76 


You  are  asked  to  make  the  adjustment  entries  necessary  to  correct  the 
account.     (Adapted  from  Indiana,  1918.) 

5.  The  Machinery  Account  on  the  books  of  the  X  Company  was  deb- 
ited with  $10,000.00  on  January  1,  1917.  Depreciation  had  not  been  consid- 
ered upon  the  books  up  to  this  date.  On  June  1,  1917,  new  machinery  was 
purchased  for  $3,000.00  and  on  September  1  old  machinery  was  scrapped,  the 
cost  price  of  which  was  $3,000.00.  The  machinery  is  estimated  to  last  five 
years.    Depreciation  is  figured  on  the  fixed  proportion  method,  no  scrap  value. 

In  May,  1918,  the  additional  equipment,  amounting  to  $2,000.00,  is  pur- 
chased. At  the  end  of  1918  the  management  decides  to  use  the  sum-of-year 
digits  method  for  calculating  depreciation. 

Give  all  entries  required  by  the  above  citation  of  facts. 

Comment. — There  is  a  difference  of  opinion  regarding  the  cost  of  removing  old 
machinery  referred  to  in  Part  4.  Such  expense  could  be  capitalized  as  part  of  the  cost 
of  the  new  machine,  charged  to  the  reserve  for  the  depreciation  of  the  old  machine, 
if  there  were  such  an  account,  or  it  could  be  charged  as  a  current  expense.  If  that 
were  the  only  spot  where  the  new  machine  could  be  conveniently  placed,  such  cost  may 
best  be  capitalized.  If  there  were  no  reserve  for  depreciation  of  the  old  machine,  it 
would  be  better  to  capitalize  the  cost  of  moving  rather  than  treat  it  as  an  expense. 
It  will  be  so  treated  here. 

PROBLEM  76 

(Wisconsin,  1915) 

In  your  examination  of  the  Automobile  Delivery  Truck  Account  of  a  com- 
pany you  will  find  the  following  entries : 

Debits 

Jan.    1,  1914,  Trucks  1,  2,  3,  4,  at  $1,200.00 $4,800.00 

July  1,   1914,  Truck  5    1,500.00 

Aug.  1,  1914,  Truck  6   1,500.00 

Credits 

Aug.  1,  1914,  Truck  2 $   900.00 

Sept.  1,  1914,  Truck  4 750.00      . 

Balance,  Sept.  1,  1914 6,150.00 

The  Reserve  for  Depreciation  for  Automobile  Delivery  Truck  Account 
stood  credited  on  January  1,  1914,  with  $1,800.00. 

Upon  analyzing  the  transactions  represented  by  these  items,  you  find  the 
following  facts: 

a.  Truck  5  purchased  July  1,  replaced  Truck  1.  The  portion  of  the  re- 
serve for  depreciation  accumulated  on  January  1  for  Truck  1  amounted  to 
$900.00.    Truck  5  was  purchased  on  open  account. 

b.  Truck  2  was  traded  in  for  $850.00  on  the  purchase  of  Truck  6,  costing 
$1,500.00.  The  differetice  was  paid  in  cash.  The  reserve  which  had  been  ac- 
cumulated for  depreciation  on  Truck  2  on  January  1  amounted  to  $300.00. 

c.  Truck  4  was  totally  destroyed  in  an  accident  September  1.  The  re- 
serve for  depreciation  on  tliis  truck  amounted  on  January  1  to  $300.00  and  it 
was  insured  for  $750.00. 

Assume  the  rate  of  depreciation  to  be  25  per  cent,  per  year. 

Give  journal  entries  which  would  properly  record  the  above  facts  and 
show  the  balances  of  all  accounts  aflFected,  as  of  September  1,  1914. 

Comment. — The  student  should  ignore  the  items  on  the  credit  side  of  the  account, 
and  make  such  entries  as  he  deems  proper  for  the  transactions  for  which  they  stand. 
The  student  is  advised  to  set  up  one  reserve  for  depreciation  account,  itemize  the 
balance  of  $1,800  on  January  1  and  indicate  the  numbers  of  the  trucks  to  which  all  the 
other  debits  and  credits  apply.  The  depreciation  is  to  be  computed  up  to  September  1, 
1914. 

77 


PROBLEM  77 

(Illinois,  May,  1910) 

A  factory  consists  of  two  blocks  of  buildingfs,  "A"  and  "B."  On  the  first 
of  January.  1907,  "A"  contains  engine  and  boiler  which  costs  $4,000.00,  and 
machinery  costing-  $13,000.00;  "B"  contains  machinery  costing  $7,000.00.  The 
following  are  purchases  of  machinery: 

October  1,  1907,  "A,"  $1,000;  July  1,  1908,  "A,"  $750;  "B,"  $1,500;  April  1,  1909, 
"A,"  $600;  "B,"  $900;  October  1,  1909,  "B,"  $250. 

On  January  1,  1908,  machinery  (costing  January  1,  1907,  $1,000)  is  sold  from  "A" 
for  $625,  and  on  July  1,  1908,  machinery  (costing  $1,300  January  1,  1907)  is  sold  from 
"B"  for  $1,000.  ^ 

The  accounts  are  made  up  to  December  31  each  year.  On  December  31, 
1909,  the  whole  premises  and  contents  are  destroyed  by  fire,  and  the  fire  in- 
surance company  agrees  to  pay  upon  the  following  basis :  Engine  and  boiler, 
cost  price  less  depreciation  8  per  cent,  per  annum  upon  that  sum ;  machinery 
in  "A,"  cost,  less  depreciation  at  10  per  cent,  per  annum  upon  diminishing 
value;  machinery  in  "B,"  cost,  less  depreciation  at  7^^  per  cent,  per  annum 
upon  diminishing  value. 

Prepare  ledger  accounts  showing  how  much  is  recoverable  upon  this  basis. 

Comment. — This  problem  illustrates  the  relation  of  depreciation  to  fire  insurance. 
The  depreciation  is  to  be  computed  to  even  calendar  months. 

PROBLEM  78 

(Wisconsin,  1918) 

In  an  audit  of  the  Acme  Motor  Car  Company  you  find  the  Reserve  for 
Depreciation  Account  and  the  Surplus  Account  composed  of  the  items  as 
here  enumerated. 

The  Reserve  for  Depreciation  Account  was  opened  on  December  31,  1915. 
the  close  of  the  first  business  year,  by  debiting  the  depreciation  accotints  of 
the  various  assets  with  $265,000.00. 

The  Reserve  for  Depreciation  Account  was  also  credited  with  $25,00000 
on  December  31,  1916,  and  with  $20,000.00  on  December  31,  1917. 

During  1916  and  1917  the  following  items  have  been  charged  against  this 
Reserve  for  Depreciation  Account : 

Assets  Scrapped $125,000.00 

•Bad  Debts  25,000.00 

Repairs 10,000.00 

Fire  Loss  on  Building  and  Equipment 7,500.00 

Organization  Expenses 65,000.00 

Salesmen's  Extra  Commission  12,000.00 

The  Surplus  Account  for  1915  and  1916  has  been  closed,  the  balance  having 
been  paid  out  in  dividends. 

The  Surplus  Account  on  December  31.  1917,  is  found  to  consist  of  the 
following  credit  items : 

Reserve  for  Car  Guarantees $  50,000.00 

Premium  on  Stock  Sold 50,000.00 

Reserve  for  Obsolescence > 50,000.00 

Bonus  from  Commercial  Club 50,000.00 

Reserve  for  Income  and  Excess  Profits  Taxes,  1917 80,000.00 

Operating  Profits  750.000.00 

You  are  requested  to  make  such  adjustments  in  the  Reserve  for  Deprecia- 

78' 


tion  Account  and  Surplus  Account  as  are  appropriate,  and  to  show  how  the 
several  items  and  accounts  should  appear  in  the  financial  statement. 

Comment. — The  practice  of  charging  improperly  many  items  to  Reserve  for  De- 
preciation and  to  Surplus  is  here  illustrated.  The  arbitrary  methods  followed  in  setting 
up  the  Reserve  for  Depreciation  are  to  be  corrected.  The  costs  of  the  assets  are  not 
given  in  the  problem,  hence  there  is  no  way  to  judge  the  adequacy  of  the  charge  except 
by  comparison  with  other  items. 

PROBLEM  79 

A  business  has  been  operating  for  five  years,  but  depreciation  on  the 
machinery  was  not  in  any  year  considered  as  an  expense.  The  machinery 
cost  $5,000  and  no  additions  have  been  made  since  installation.  It  has  an 
estimated  life  of  12  years  and  a  scrap  value  of  $500. 

The  net  profit  or  loss,  according  to  the  company's  books,  for  each  of  the 
five  years  is  as  follows : 

1916  Profit $5,492.00 

1917  Profit 6,910.00 

1918  Profit 4,132.00 

1919  Loss 165.00 

1920  Profit 2,206.00 

Average $3,715.00 

After  calculating  the  depreciation  at  17^%  on  the  fixed  percentage 
(diminishing  balance)  method,  and  duly  recognizing  the  annual  charges,  you 
find  errors  in  the  annual  operating  statements  which  result  in  the  following 
net  adjustments  to  the  figures  prepared  from  the  company's  books. 

1916  Reduction  of  Profit  by $400.00 

1917  Increase  of  Profit  by 852.00 

1918  Reduction  of  Profit  by 690.00 

1919  Reduction  of  Loss  by 102.00 

1920  Increase  of  Profit  by 136.00 

Prepare  a  table  showing  the  amount  of  these  profits  or  losses. 

The  average  net  profit  remains  the  same  as  before  the  adjustments  were 
made,  $3,175.00.  Why  would  you  consider  it  necessary  that  your  figures  be 
used,  rather  than  those  prepared  by  the  company? 

PROBLEM  80 

(a)  The  following  account  is  a  copy  of  the  Machinery  and  Equipment 
account  of  the  A  Company  as  it  stood  on  December  31,  1920.  The  account 
has  not  been  balanced  since  1915.  and  various  purchases,  repairs,  and  re- 
newals have  been  charged  to  it.  Depreciation  has  also  been  charged  to  it  at 
the  rate  of  20%  annually,  the  basis  being  the  total  of  the  charges  to  the 
account.  Depreciation  was  properly  charged  as  a  manufacturing  expense, 
but  no  Reserve  for  Depreciation  account  was  set  up. 

Machinery  and  Eqmpment 

1915  Machinery  Purchase    $15,000.00         1915  Depreciation $2,200.00 

1916  Machinery  Purchase    1,000.00         1916  Depreciation 2,475.00 

1916  Repairs   to   Machinery...        500.00         1917  Depreciation 2,662.50 

1917  Renewals  to  Machinery..      1,250.00         1918  Depreciation 3,150.00 

1918  Machinery    Purchases ....     2.500.00         1919  Depreciation 3,675.00 

1918  Renewal  and   Expense...        750.00         1920  Depreciation 3,900.00 

1919  Machinery    Purchases 3,000.00 

1919  Repairs   500.00 

1920  Renewals  1,500.00 

79 


The  A  Company  now  sells  its  plant  and  includes  the  machinery  and  equip- 
ment at  $10,000.  Adjust  and  correct  the  above  account,  set  up  the  accounts 
as  they  should  be,  and  determine  the  profit  or  loss  on  the  machinery  and 
equipment,  assuming  the  rate  of  depreciation  to  have  been  adequate. 

(b)     The  Automobile  Truck  account  of  the  A  Company  was  as  follows : 

Automobile  Truck 

1918  New  Truck  Purchase $4,200.00        1918  Depreciation $1,250.00 

1918  Repairs 800.00         1919  Depreciation 2,000.00 

1919  New  Truck  Purchase 2,500.00        1920  Depreciation 2,300.00 

1919  Renewal  of  Motor 500.00 

1920  New  Truck  Purchase 1,200.00 

i.:.. 

Depreciation  had  been  charged  into  the  expense  accounts  but  there  was 
no  Reserve  for  Depreciation  account.  It  was  credited  to  the  Automobile 
Truck  account.  The  basis  for  determining  the  charges  at  a  25%  annual  rate 
was  the  total  debits  to  the  Automobile  Truck  accoulnt. 

The  truck  purchased  in  1919  was  wrecked  the  day  before  the  sale  of  the 
company  was  completed.  The  salvage  value  of  the  truck  was  $150  and 
$1,250  insurance  was  allowed  by  the  insurance  company.  The  remainder  of 
the  trucks  were  included  in  the  sale  at  $3,800. 

Adjust  and  correct  the  accounts  and  determine  the  profit  or  loss  on  the 
sale  of  the  trucks. 


PROBLEM  81 

In  the  examination  of  the  books  of  the  A  Company  it  is  found  that  the 
Equipment  Account,  the  Reserve  for  Depreciation  Account  and  the  Operat- 
ing Expense  Accounts  have  been  improperly  kept.  Charges  which  should 
have  been  made  against  the  Reserve  for  Depreciation  Account  have  been 
made  in  some  cases  to  the  Operating  Expense  Account  and  in  other  cases  to 
the  Asset  Account.  Scrapped  assets  have  beejn  allowed  to  remain  in  the 
Assets  Accounts  at  original  cost. 

The  following  data  are  given  with  the  request  that  the  proper  adjustment 
entries  be  made  so  that  the  Equipment  Account,  the  Reserve  for  Deprecia- 
tion Account,  and  the  net  eflfect  upon  the  operating  profit  for  each  year  will 
be  clearly  shown. 

Type  A  equipment  purchased  in  1917  to  the  amount  of  $100.00  was  charged 
to  the  Asset  Account  when  it  should  have  beeJn  charged  to  the  Reserve  for 
Depreciation  Account.     Likewise  in   1918  $500.00  had  been  so  charged. 

In  1916  replacements  to  Type  B  equipment  amounting  to  $600.00  had  been 
charged  to  the  Equipment  Account  when  it  should  have  been  debited  to  the 
Reserve  for  Depreciation  .Account.  In  1917  similar  items  aggregated  $750.00, 
and  in  1918  $350.00. 

Type  C  equipment  was  traded  in  January,  1917,  for  Type  D  equipment. 
Type  D  equipment  is  valued  at  $10,000.00.  The  portion  of  the  Reserve 
for  Depreciation  Account  applicable  to  Type  C  was  found  to  be  $8,500.00. 
However,  a  loss  of  only  $5,000  was  suffered  when  the  machinery  was  traded. 

Type  E  equipment  contains  charges  to  the  amount  of  $5,000.00  which 
should  have  been  charged  against  the  Reserve  for  Depreciation  Account.  The 
amounts  of  the  several  years  are  as  follows:  1916,  $1,500.00;  1917.  $2,000.00; 
1918,  $1,500.00. 

An  analysis  of  the  Factory  Repair  Account  shows  that  during  1916  items 
amounting  to  $2,000.00  had  been  charged  to  this  account  which  should  have 

80 


been  charged  against  the  Reserve  for  Depreciation  Accou'jit.     In  1917  similar 
items  totalled  $2,500.00,  and  in  1918  $1,750.00. 

The  rates  of  depreciation  are  as  follows :  Type  A,  10  per  cent. ;  Type  B, 
20  per  cent.,  and  Type  E,  25  per  cent. 

Comment. — Corrections  of  somewhat  complicated  errors  in  computing  deprecia- 
tion are  called  for  by  this  problem.  Each  type  of  equipment  must  be  considered 
separately  and  for  every  year  it  has  been  owned.  The  student  is  to  assume  that  no 
depreciation  is  to  be  computed  on  type  D  equipment  on  account  of  the  short  time  it 
was  owned.  In  connection  with  the  type  C  equipment,  the  problem  states  that  a  $5,000 
loss  was  suffered.  The  loss  is  assumed  to  have  been  arrived  at  without  computing 
depreciation  since  the  problem  states  that  the  accounts  have  been  improperly  kept. 

PROBLEM  82 

(Wisconsin,  May,  1919) 

The  A  Company  had  an  appraisal  made  early  in  January,  and  after  com- 
pleting the  annual  audit  for  the  A  Company  the  Directors  authorize  you  to 
record  upon  the  books  the  proper  values  as  given  in  the  appraisal.  .-Xmong 
the  terms  used  in  the  appraisal  company's  report  are  the  following: 

1.  Sound  Value. 

2.  Depreciated  Value. 

3.  Replacement  Value. 

4.  Insurable  Value. 

5.  Book  Value. 

Define  each  of  these  terms  and  state  definitely  just  what  values  it  would 
be  proper  to  record  upon  the  books. 

What  adjustment  account  or  accounts  would  be  used  in  the  work  and  what 
disposition  should  be  made  of  any  balances  remaining  in  such  account  or 
accounts? 

Comment. — The  definition  of  five  terms  used  by  appraisers  are  called  for  in  the 
first  part  of  the  problem.  A  description  of  the  use  of  the  Appraisal  Adjustment  account 
is  called  for  in  the  second  part  of  the  question. 

PROBLEM  83 

(Massachusetts,  October,  1914) 

The  following  is  a  trial  balance  of  Blank  Manufacturing  Company  at  De- 
cember 31,  1913,  before  closing: 

Land $     2,000.00 

Buildings 25,250.00 

Machinery  and  Equipment 31,120.00 

Materials  Used  in  Manufacture 35,930.00 

Wages 13,560.00 

Salaries 3,500.00 

Repairs 740.00 

Insurance  and  Taxes 850.00 

Office  Expenses  1.560.00 

Depreciation 1,200.00 

Accounts  Receivable 24,130.00 

Accounts    Payable $  17,820.00 

Bank  Loans 5,000.00 

Inventory,  December  31,  1913 8,210.00 

Accrued  Interest 150.00 

Interest 150.00 

Sales 74,610.00 

Trade  Discounts  on  Sales 1,730.00 

Capital 50,000.00 

Surplus 2,350.00 

$149,930.00        $149,930.00 


An  appraisal  was  made  of  the  plant  as  of  December  31,  1913,  which  showed 
the  following  values : 

Replacement  Depreciation 

Value  Value 

Land $  1,800.00 

Buildings 30,000.00  $27,000.00 

Machinery  and  Equipment 42,000.00  33.600.00 

The  Board  of  Directors  approve  the  appraisal  values,  and  pass  a  resolution 
to  change  the  books  to  agree  therewith. 

1.  Prepare  journal  entries  to  adjust  the  books  to  agree  with  values  shown 
by  the  appraisal. 

2.  Prepare  balance  sheet  and  Profit  and  Loss  Account  after  giving  effect 
to  the  appraisal  adjustment. 

Comment. — In  this  problem  the  results  of  an  appraisal  are  to  be  recorded  on  the 
books.  In  the  solution,  the  student  is  expected  to  use  an  Appraisal  Adjustment 
account. 

PROBLEM  84 

»  (Illinois,  December,  1918) 

You  are  called  upon  to  examine  the  accounts  of  a  corporation  for  the 
purpose  of  certifying  its  balance  sheet.  An  item  is  carried  on  the  liability 
side  described  "Sundry  Reserves — $375,000.00.'  You  will  find  that  this  amount 
is  made  up  as  follows : 

Reserves  for  Contingencies $  50,000.00 

Plant  Depreciation  Reserve 80,000.00 

Reserve  for  Bad  Debts 10,000.00 

Reserve  for  Collection  Expenses 15,000.00 

Premium  on  Sale  of  Capital  Stock 12.000.00 

Reserve   for   Personal   Injury   Suit   which   has  just   been  decided 

itgamst  the  Company 8,000.00 

Reserve  for  Patent  Litigation  Pending 20,u00.00 

Reserve  for  Income  and  War  Excess  Profits  Taxes 40,000.00 

Special    Reserve  against  a   Possible    Drop   in    Market  Values   of 

:*lerchandise  on  Hand , X,000.00 

Sinking  Fund  for  Retirement  of  Bonds 48,000.00 

Provision  against  Dismantlement  of  Aurora  Works 34,000.00 

Pension    Fund 28,000.00 

$375,000.00 

The  president  is  unwilling  to  change  the  company's  balance  sheet  without 
consulting  the  Board  of  Directors  and  states  that  if  you  take  exception  to  this 
item  you  should  write  him  with  your  views  so  that  he  may  bring  the  matter 
formally  before  them.  Write  such  a  letter,  stating  clearly  the  reasons  for  any 
exception  you  may  take. 

Comment. — This  problem  furnishes  a  review  of  the  classification  of  reserve  accounts. 
What  characteristic  distinguishes  valuation  accounts  from  true  reserves?  Which  of 
these  items  listed  as  reserves  are  liabilities  rather  than  reserves? 


PROBLEM  85 

(Wisconsin,  1916) 

The  Wisconsin  Hardware  Company  is  to  be  organized  as  follows :  A  and 
B  are  equal  partners  in  a  retail  hardware  business,  the  financial  condition  of 
which  is  shown  by  the  following  balance  sheet : 

P2 


Cash  on   Hand  and  in   Bank $  2,000.00 

Accounts  Receivable   4,000.00 

Merchandise 6,000.00 

Fixtures  400.00 

Shop  Tools  300.00 

Delivery  Equipment 300.00 

Total  Assets  $13,000.00 

Liabilities  and  Capital 

Accounts  Payable   $  1,000.00 

A— Investment 6,000.00 

B— Investment 6,000.00 

$13,000.00 
The  above  net  worth  is  to  be  combined  with  $6,0(X).0O  cash  to  be  brought 
in  by  C,  and  the  Wisconsin  Hardware  Company  is  to  be  formed  and  is  to 
issue  $18,000.00  of  full  paid  stock,  $6,000.00  each  to  A.  B  and  C  in  payment 
for  their  respective  contributions. 

Immediately  upon  the  formation  of  the  new  firm  the  company  is  to  pur- 
chase the  business  of  a  competing  hardware  store  in  the  same  city,  and  to 
continue  its  operation  as  a  second  store  under  the  name  "Badger  Hardware 
Store." 

The  "Badger"  store  inventory  is  as  follows : 

Stock   of   Merchandise $  6,500.00 

Fixtures 200.00 

Delivery  Equipment 350.00 

Total  to  be  Taken  Over $  7,050.00 

The  stockholders  expressly  instruct  the  accountant  to  design  an  account- 
ing system  so  that  each  store  may  keep  its  own  set  of  books,  pay  its  own  bills, 
have  its  own  cash  account  and  bank  account  and  prepare  its  own  detailed 
operating  and  financial  statements  at  the  end  of  each  month. 

The  accounts  of  the  Wisconsin  Hardware  Company  must  be  so  arranged 
as  to  reflect  the  ownership  and  operating  profits  or  losses  of  the  Badger  store. 

Triplicate  sales  books  are  to  be  used  at  each  store.  These  will  supply  the 
individual  accounts  receivable  accounts,  and  the  system  designed  should 
recognize  the  use  of  the  sales  book  slips  for  other  purposes. 

Keeping  in  mind  the  above  facts: 

a.  Design  a  classification  of  accounts  for  the  Wisconsin  Hardware  Com- 
pany's main  store. 

b.  Sketch  the  ruling  of  such  books  of  original  entry  as  you  deem  ad- 
visable. 

c.  Give  the  necessary  journal  entries  to  record  the  conversion  of  the  part- 
nership into  a  corporation  upon  the  new  books. 

d.  Give  the  necessary  journal  entries  to  record  the  purchase  of  the 
"Badger  Hardware  Store." 

e.  Give  the  entries  necessary  to  open  the  books  at  the  "Badger  Hard- 
ware Store." 

f.  Outline  a  method  of  approximately  determining  monthly  profits  where 
physical  inventory  of  stock  is  taken  but  once  a  year,  and  draft  form  of  oper- 

•ating  statement  suitable  for  main  store. 

Comment. — The  Wisconsin  Hardware  Company  problem  covers  several  important 
accounting  subjects,  the  chief  of  which  is  a  classification  of  accounts  which  provides  for 
proper  records  of  a  main  store  and  one  branch  store. 

In  connection  with  the  rulings  of  books  of  original  entry,  the  attention  of  the 
student  is  called  to  the  fact  that  this  problem  refers  to  a  retail  hardware  business.  The 
routine  of  such  a  retail  business  will  need  consideration. 

88 


PROBLEM  86 
(Wisconsin,  1916) 

As  accountant  to  a  coal  mine  you  are  instructed  to  prepare  estimates  of 
the  cash  balances  at  the  close  of  each  of  the  succeeding  six  months.  The  fol- 
lowing details,  averages  of  the  past  years,  are  available : 

Cost  of  Mining $0.5107  per  ton 

Current  Selling  Price 75       per  ton 

Assume  that  the  mine  starts  operation  January  1  after  having  been  shut 
down,  that  there  was  $50,000.00  cash  in  bank  at  that  date,  that  mining  will  be 
at  the  rate  of  80,000  tons  per  month,  that  all  labor  and  supplies  are  paid  for 
in  cash,  and  that  the  company  has  contracts  for  delivery  of  60,000  tons  per 
month,  payable  the  following  month. 

a.  Prepare  an  estimate  of  monthly  cash  balances,  January  31  to  June  30. 

b.  What  are  the  profits  for  the  six  months? 

Comment.^ — In  this  problem  on  cash  balances  it  will  be  necessary  to  assume  that 
there  are  no  bad  accounts  among  the  receivables  and  that  all  accounts  are  paid  during 
the  month  in  which  they  fall  due.  The  profits  will  be  found  by  the  balance  sheet 
method. 

PROBLEM  87 
(Illinois,  May,  1913) 

The  accounting  firm  of  C,  P  &  A  employ  you  as  a  senior  accountant  and 
for  your  initial  job  requires  you  to  draft  a  Bills  Receivable  Account  and  a 
Bills  Payable  Account  from  memoranda  taken  from  the  diary  of  a  client,  who 
is  an  expert  broker,  as  follows : 
1912 

Jan.     2.     Took  G.  D.'s  Note,  90  Days' Settlement  of  Account $   600.00 

"      3.     Accepted  M.  O.'s  30-day  Draft,  Documents  Attached  for  Goods  Shipped 

Me  from  Paris 1,945.00 

"       4.     Received  from  Bank  of  Havanna  60-day   Draft,   for  Proceeds  of  Ac- 
counts Collected  by  Them 425.00 

"     24.     Received  from  B.  A.  Note  at  30  Days  on  Settlement  of  Account 650.00 

"     25.     Drew  on  C.  M.  15  Days  from  Date  for  Account  of  Goods  Shipped  to 

London    350.00 

"     26.     Accepted  L.  H.'s  Draft,  60  Days  Sight 750.00 

"    28.     Received  C.  M.'s  Draft,  Accepted  January  26th 350.00 

"     29.     Discounted  G.  D.'s  Note  at  Bank,  Received 591.25 

Feb.    5.     Paid  M.  O.  Draft 

"     10.     Discounted  Bank  of  Havana  Draft,  Received 41 1.65 

"     11.     C.  M.  Draft  Returned 

"     26.     B.  A.  Note  Paid. 
Draft  the  said  accounts. 

Comment. — The  dates  of  entries  are  important.  How  are  discounted  notes  to  be 
recorded? 

PROBLEM  88 

(Illinois,  1907) 

In  1895  the  Chicago  Manufacturing  Company  purchase  real  estate  costing 
$12,000.00,  erect  a  building  for  $30,000.00,  and  purchase  machinery  costing 
$25,000.00.  No  further  purchases  are  made,  and  on  January  1,  1905,  a  balance 
sheet  of  the  company  discloses  the  following  condition : 

84 


Real    Estate $  12,000.00 

Buildings  30,000.00 

Machinery  25,000.00 

Merchandise    Inventory 60,000.00 

Accounts    Receivable 75,000.00 

Cash    10,000.00        $212,000.00 

Liabilities 

Capital    Stock $150,000.00 

Surplus 23,500.00 

Reserve   for  Deprecfation: 

On  Buildings  7,500.00 

On  Machinery  15,000.00 

Accounts  Payable  16,000.00        $212,000.00 


On  May  16,  1905,  their  factory  is  burned  down,  a  total  loss  ensuing.    Their 
books  of  account  as  on  that  date  show  the  following  ledger  balances :    . 

Debit  Balances 

Real  Estate  $  12,000.00 

Buildings  30,000.00 

Machinery    25,000.00 

Merchandise   Inventory,  January  1,  1905 60,000.00 

Purchases    150,000.00 

Labor  and  Other  Factroy  Cost 60,000.00 

General  Expenses  45,000.00 

Accounts  Receivable  73,000.00 

Cash    32,000.00        $487,000.00 

Credit  Balances 

Capital  Stock  $150,000.00 

Surplus 23,500.00 

Reserve  for  Depreciation: 

On  Buildings   7,500.00 

On  Machinery  15,000.00 

Sales    (Net)    280,000.00 

Accounts   Payable    11,000.00        $487,000.00 


For  the  years  1902  and  1904  their  books  showed  a  gross  profit  on  manu- 
facturing averaging  25  per  cent,  of  the  net  sales.  The  company,  however, 
only  succeeds  in  obtaining  $55,000.00  from  the  first  insurance  companies  for 
merchandise  lost. 

In  respect  to  the  buildings  and  machinery  the  companies  acknowledge  that 
the  cost  of  replacing  same  would  be  10  per  cent,  higher  in  1905  than  in  1895, 
and  after  taking  this  fact  into  consideration  and  determining  what  they  con- 
sider fair  depreciation  they  settle  these  two  items  as  follows :  Building  $28,- 
000.00,  machinery  $17,500.00.  The  company  erects  a  new  building  costing 
$40,000.00  and  purchases  machinery  costing  $35,000.00,  and  finding  that  the 
value  of  its  real  estate  is  now  $24,000.00  it  makes  book  entry  to  so  record  it. 

Prepare  cash  book  and  iournal  entries  to  properly  record  all  of  the  above 
transactions,  losses  or  gains  due  to  fire,  actual  trading  profit  from  January  1, 
1905,  to  date  of  fire,  and  balan-f^e  sheet  after  making  all  above  entries.  For 
purposes  of  this  question  assume  no  accounts  receivable  collected  or  accounts 
payable  paid. 

Comment. — The  student  is  advised  to  use  a  Fire  Loss  Adjustment  account.  Should 
the  real  estate  be  written  up  to  $24,000? 


PROBLEM  89 

(Florida,  1915) 

The  store  and  stock  of  the  Diamond  Jewelry  Company  was  destroyed  by 
fire  on  November  1.  The  safe  was  opened  and  books  were  recovered  intact. 
The  trial  balance  taken  off  was  as  follows : 

Cash  in  Bank $  1,000.00 

Accounts  Receivable    10,000.00 

Accounts  Payable •                      $  30,000.00 

Merchandise   Purchases    90,000.00 

Furniture  and  Fixtures 7,500.00 

Sales    110,000.00 

General  Expense 18,000.00 

Insurance  1,500.00 

Salaries     5,500.00 

Real  Estate— Store  Lot ' 50,000.00 

Store  Building  35.000.00 

CapHal  Stock  50,000.00 

Surplus    28.500.00 

$218,500.00        $218,500.00 

The  a\  erag^e  gross  profit  as  shown  by  the  books  and  accepted  by  the  insur- 
ance company  was  40  per  cent,  of  sales.  The  insurance  adjuster  agreed  to 
pay  75  per  cent,  of  the  book  value  of  furniture  and  fixtures,  90  per  cent,  of  the 
book  value  of  the  store  building,  and  the  entire  loss  on  merchandise  stock. 

Draft  journal  entries  to  include  the  account  against  the  insurance  com- 
panies, and  construct  final  proof  and  loss  account  and  balance  sheet. 

Comment. — This  is  another  insurance  problem  in  which  the  j^ross  profit  method  of 
arriving  at  values  of  inventories  should  be  used. 


PROBLEM  90 

The  .A  Company  was  totally  destroyed  by  fire  on  July  31,  but  the  books  of 
the  company  were  saved.  From  them  the  following  facts  were  ascertained 
regarding  the  transactions  since  the  last  closing: 

Sales    ..  . $  51,000 

Merchandise    Purchase 125,000 

Inventory  of  Merchandise,  Dec.  31 85,000 

Among  the  miscellaneous  records  saved  were  foiuid  memorannums  of 
three  transactions  not  yet  entered  on  the  books  . 

(1)  A  memorandum  of  a  gross  profit  of  $12,375.00  on  a  sale  made  on 
July  30.  The  amount  of  the  sale  could  not  be  discovered,  but  it  was  dis- 
covered by  the  auditor  that  the  goods  in  this  transaction  had  been  marked 
40%  above  cost  price  and  that  a  discount  of  5%  had  been  allowed  for  cash, 
which  discount  had  been  deducted  before  the  "g-ross''  profit  had  been  obtained. 

(2)  A  memorandum  of  a  sale  to  Jones  and  Company,  amounting  to 
$25,2(30.00,  half  of  which  had  been  shipped  and  half  of  which  had  remained  in 
the  storehouse  at  the  time  of  the  fire.  These  goods  had  been  marked  up  50% 
for  the  purpose  of  the  sale. 

(3)  A  memorandum  of  a  shipment  of  goods  which  the  company  had 
expected  to  sell  for  $16,600.00.    Three-fifths  of  these  goods  had  been  received, 

86 


and  two-fifths  were  still  in  transit.     The  above  expected  selling  price  had 
been  obtained  by  inarking  up  the  cost  price  33^5%- 

By  an  examination  of  the  past  records  of  the  business  the  auditor  deter- 
mined that  the  gross  profit  in  past  years  has  averaged  50%. 

(a)  Proceed  to  determine  the  total  fire  loss. 

(b)  Determine  the  rate  of  gross  profit  for  the  company  after  the  above 
transactions  have  been  adjusted. 

PROBLEM  91 
(Adapted  from  Institute,  May,  1920) 

The  books  of  a  concern  recently  burned  out  contained  evidence  of  pur- 
chases, including  inventory,  of  $200,000  and  sales  of  $40,800  since  the  last 
closing.  Upon  investigation,  however,  the  auditor  ascertained  that  a  sale  of 
merchandise  had  been  made  just  prior  to  the  fire,  and  not  recorded  in  the 
books  at  an  advance  of  two-fifths  (%)  over  cost  less  a  10%  cash  discount,  on 
which  the  profit  was  $31,928.00.  The  past  history  of  the  business  indicated 
an  average  gross  profit  of  50%  on  cost  of  goods  sold. 

(a)  What  amount  should  be  claimed  as  fire  loss? 

(b)  What  rate  of  gross  profit  do  the  transactions  finally  yield? 

PROBLEM  92 

(Wisconsin,  November,  1919) 

On  October  31,  1919,  the  store  of  the  Good  Merchandise  Company  was 
destroyed  by  fire.  It  was  a  total  loss.  The  books  and  records  were  found  to 
be  complete  and  the  trial  balance  built  up  as  of  October  31  was  as  follows: 

Accounts  Receivable   $  7,000.00 

Accounts  Payable  $     5,000.00 

Cash    2,000.00 

Mdse.  Inventory,  January  1,  1919 15,000.00 

Mdse.  Purchases  85,000.00 

Real    Estate    3.000.00 

Dividends   Paid   4.000.00 

Buildings   and    Fixtures '  1«.(XK).00 

Furniture  and   Furnishings 5,000.00 

Reserve  for  Depreciation.  Bldgs.  and  Fix 3,000.00 

Reserve  for  Depreciation,  Furn.  and  Fnsh 300.00 

Unexpired    Insurance    2,500.00 

Mdse.    Sales    99,000.00 

Miscellaneous  Income  1,500.00 

Clerks'  Salaries    5,000.00 

Light,  Heat  and  Power 1,000.00 

Advertising    2,000.00 

Office  Salaries   2,500.00 

Officers'  Salaries  5,000.00 

Postage 700.00 

Treasurv  Stock   10,000.00 

Taxes    2,500.00 

Telephone    and    Telegrams 150.00 

Sundry    General    Expense '. 500.00 

Capital  Stock   50,000.00 

.  Surplus   12,050.00 

$170,850.00        $170,850.00 

An  average  gross  profit  of  33V3  per  cent,  was  agreed  upon  by  all  partie.'^ 
concerned. 

87 


Stock,  buildings,  fixtures  and  furnishings  were  insured  under  the  80  per 
cent,  clause,  the  building,  etc.,  for  $15,000.00  and  the  stock  for  $32,000.00.  Set- 
tlement is  made  on  the  basis  of  these  facts. 

You  are  asked  to  give :  ■ 

a.  The  profit  or  loss  due  to  fire. 

b.  The  operating  statement  for  the  period  ending  October  31. 
Comment. — The  student  is  to  assume  that  the  $15,000,  insurance  mentioned  in  the 

next  to  the  last  paragraph  applied  to  both  buildings  and  fixtures  and  furniture  and 
furnishings.  The  gross  profit  method  of  arriving  at  the  value  of  the  inventory  must 
be  used.     Does  the  co-insurance  clause  apply? 

PROBLEM  93 

The  A  Company  operates  four  camps  and  has  its  property  insured  under 
the  average  clause  and  also  under  the  80  per  cent,  co-insurance  clause.  The 
amount  of  insurance  carried  is  $13,125.00,  and  a  fire  loss  of  $415.69  has  oc- 
curred in  Camp  No.  1. 

The  sound  property  valuations  are  as  follows ; 

Camp  No.   1 $  3,022.99 

Camp  No.  2 10,708.61 

Camp  No.  3 9,953.90 

Camp  No.  4 14,879.05 

Total • $38,564.55 

The  insurance  policies  carried  in  the  several  companies  are  as  follows : 

Company    A $  1 ,625.00 

B 2,500.00 

C 5,000.00 

D 2,500.00 

E 1,500.00 

$13,125.00 

You  are  asked  to  determine  the  portion  of  the  loss  which  the  assured  con- 
tributes and  to  apportion  the  claim  among  the  five  companies. 

Comment. — In  this  fire  loss  problem  are  found  both  the  average  clause  and  the  80% 
co-insurance  clause.  The  average  applies  to  the  total  insurance  carried  and  must  be 
prorated  over  the  camps  before  the  co-insurance  clause  is  applied. 

PROBLEM  94 

(New  York,  June,  1914) 

John  Adams  lost  his  stock  of  merchandise  May  1.  1914,  through  a  flood  in 
the  Mississippi  River. 

Adams  applied  to  the  local  Mutual  Flood  Insurance  Society  for  reimburse- 
ments, claiming  a  loss  of  $5,886.35  on  merchandise  stock.  From  the  following 
data  ascertain  his  merchandise  inventorv : 

Net  profits  May  1,  1914,  $4,452.91  ; 'drawings,  $1,598.00;  legal  expenses, 
$17.50;  interest  debit,  $313.00;  advertising,  $14.00;  commissions  debit,  $961.01  ; 
insurance,  $196.23;  sales,  $81,688.04;  inventory  December.  1911.  $1,568.62; 
purchases.  $55,415.82  ;  labor,  productive,  $19,499..S8  ;  telephone,  $416.06;  sundry 
factory  expenses,  $3,201.92;  repairs,  $16.00;  surplus  May  1,  1914,  $2,854.91. 

Comment. — This  problem  involves  the  gross  profit  method  of  determining  the  value 
of  the  inventory.  However,  the  gross  profit  must  be  built  up  from  the  facts  given 
starting  with  net  profit.  For  purposes  of  this  problem  treat  insurance  as  a  manu- 
facturing expense. 

68 


PROBLEM  95 
(Adapted  from  English  Final  Examination,  May,  1912) 

The  Alpha  Manufacturing  Company  had  an  authorized  capital  of  $100.- 
000.00,  divided  into  600  "A"  shares  and  400  "B"  shares  of  $100.00  each,  of 
which  500  "A"  and  250  "B"  shares  were  issued  and  fully  paid  up.  The  com- 
pany's articles  provided  that  the  profits  should  be  divided  as  follows,  so  far 
as  the  directors  might  decide : 

1.  In  payment  of  a  cumulative  dividend  of  10  per  cent,  on  the  "A"  and 
20  per  cent,  on  the  "B"  shares. 

2.  In  payment  of  a  non-cumulative  dividend  of  15  per  cent,  on  the  "B" 
shares. 

3.  In  payment  of  a  non-cumulative  dividend  of  lYz  per  cent,  on  the  "A" 
shares. 

4.  In  payment  of  a  further  dividend  pro  rata,  but  so  that  the  dividend  on 
each  "B"  share  should  be  twice  that  on  each  "A"  share. 

The  profits  for  the  year  1910  amounted  to  $45,000.00,  and  there  was  an  un- 
distributed balance  from  1909  of  $17,500.00. 

The  directors  decided  to  pay  the  dividends  under  1,  2  and  3  above,  and  a 
further  dividend  under  4  of  7^  per  cent,  on  the  "A"  and  15  per  cent,  on  the 
"B"  shares ;  and  to  place  one-half  of  the  balance  to  Reserve  for  Contingencies 
and  carry  the  other  half  forward  to  next  year. 

PROBLEM  96 

(Wisconsin,  1918) 

The  stockholders  of  the  Farmers'  Co-operative  Store  share  the  store's 
earnings  in  proportion  to  purchases  made  during  the  year,  and  "dividends" 
may  be  withdrawn  in  trade  or  in  cash.  The  fiscal  year  corresponds  to  the 
calendar  year,  but  the  dividend  year  runs  from  March  15  to  March  14. 

a.  The  following  facts  are  given  you  with  the  request  that  you  ascertain 
the  status  of  the  Surplus  Account  on  December  31,  1917.  and  indicate  the  dis- 
position of  any  "dividends"  which  may  have  been  paid  out  in  excess  of  avail- 
able surplus : 

The  balance  of  the  Reserve  for  "Dividends"  Account  on  December  31, 
1916,  was  $2,540.15.  This  represented  the  "dividends"  which  might  be  with- 
drawn in  cash  during  the  period  January  1,  1917,  to  March  15,  1917. 

The  "dividends"  withdrawn  in  cash  during  the  year  1917  amount  to 
$1,015.37,  and  those  withdrawn  in  trade  during  1917  amount  to  $24,786.29. 
In  order  to  reduce  trade  "dividends"  to  a  cash  basis,  20  per  cent,  is  deducted 
from  the  selling  price  of  goods  so  withdrawn  and  charged  back  against  the 
sales. 

The  balance  of  surplus  available  for  dividends  on  December  31,  1916,  was 
$20,710.43. 

An  examination  of  the  accounts  show  that  "dividends"  to  the  amount  of 
$2,496.63  (cash  basis)  may  be  withdrawn  between  January  1,  1918,  and  March 
14,  1918. 

During  the  period  January  1.  1917,  to  March  14,  1917,  "dividends"  were 
withdrawn  to  the  amount  of  $1,720.15,  cash  basis. 

b.  The  sales  to  members  for  the  year  1917  are  $162,280.00  and  the  net 
profits  are  $20,285.00.  In  your  judgment  what  "dividend"  should  be  declared 
in  trade  and  in  cash  for  the  year  1918? 

89 


c.  Briefly  criticise  the  plan  followed  by  this  company  in  distributing  the 
earnings  to  the  stockholders. 

Comment. — In  the  solution  of  this  problem  dealing  with  dividends  of  cooperative 
stores  the  student  is  to  assume  that  any  dividends  not  drawn  by  the  end  of  the  dividend 
year  are  forfeited. 

PROBLEM  97 

(Iowa,  1918) 

The  Jones  Company,  Incorporated,  acquired  the  business  from  S.  R.  Jones, 
who  took  bonds  amounting  to  $50,000.00  in  part  payment.  These  mature  in 
twenty  years,  and  can  be  cancelled  by  payment  after  fifteen  years,  and  bear 
interest  at  the  rate  of  5  per  cent,  per  annum.  A  sinking  fund  is  to  be  estab- 
lished for  their  redemption  by  payment  to  the  Bankers  Trust  Co.,  Trustees, 
of  $2,500.00  a  year,  the  interest  on  this  fund  to  accumulate  to  help  in  retiring 
the  bonds  before  twenty  years. 

November  30,  1918,  was  the  end  of  the  first  fiscal  year  and  the  trial  bal- 
ance of  that  date  is  as  follows: 

Real  Estate  $  30,000.00 

Buildings 30,000.00 

Machinery 43,150.00 

Accounts  Receivable 4,260.00 

Cash    12,759.00 

Merchandise 46,540.00 

Labor 20,000.00 

Office  Expense  1,950.00 

Miscellaneous  Investments    440.00 

Bond  Sinking  Fund 2,500.00 

Interest  Paid  on  Bonds 3,000.00 

Capital  Stock   $  50,000.00 

Bonds  Payable    50,000.00 

Net  Sales  68,090.00 

Notes  Payable   5,000.00 

Accounts  Payable  21,450.00 

Miscellaneous  Income  60.00 

$194,600.00        $194,600.00 

Inventory  of  merchandise  is  $28,500.00. 

Under  date  of  May  30,  1918,  the  company  paid  the  Bankers  Trust  Co. 
$2,500.00.  Under  date  of  November  30,  1918,  the  Bankers  Trust  Co.  reported 
that  they  had  received  the  $2,500.00;  that  on  June  15.  1918,  they  purchased 
two  $1,000.00  bonds  at  par  and  accrued  interest.  Rate  of  interest  5  per  cent., 
payable  in  November  and  May  each  year,  that  they  collected  $50.00  interest 
on  November  1,  1918,  and  that  they  have  allowed  4  per  cent,  interest  per 
annum,  computed  semi-annually,  on  the  lowest  amount  of  cash  in  the  fund 
during  the  period. 

They  show  the  cash  in  the  fund  which  you  are  asked  to  compute  from  the 
above  to  verify  the  correctness  of  their  balance. 

(1)  Make  the  necessary  journal  entries  to  close  the  books  for  the  fiscal 

year. 

(2)  Prepare  income  and  expense  accounts  for  the  year. 

(3)  Construct  balance  sheet  as  of  November  3.  1918. 

(4)  Prepare  statement  of  sinking  fund  in  hands  of  Bankers  Trust  Co. 

Comment.— The  Jones  Company  problem  furnishes  an  exercise  in  computing  the 
interest  on  sinking  funds  and  accounting  for  the  same.  Annual  payments  into  sinking 
funds  are  usually  made  at  the  end  of  the  year.  The  fund  is  increased  by  interest  on 
securities  in  the  sinking  fund  as  well  as  interest  on  cash  not  invested.  As  stated  before, 
the  interest  earned  by  the.  sinking  fund  is  financial  income  of  the  corporation  even 
though  the  cash  has  to  remain  in  the  fund. 

90 


PROBLEM  98 
(Adapted  from  Illinois,  May,  1916) 

(a)  A  company  is  formed  for  the  purpose  of  acquiring  certain  real  estate 
and  g-radually  realizing-  the  same.  The  directors  request  you  to  open  the 
books  from  the  following  details: 

Authorized  Capital  Stock $5,000,000.00 

Capital  Stock  Issued  for  Real  Estate  Acquired. 2,500,000.00  ' 

Capital  Stock  Issued  to  Promoters  for  Services  Rendered 1,000,000.00 

Appraised  Value  of  Real  Estate 7,500,000.00 

6%   First   Mortgage   Gold   Bonds   Issued  and   Fully  Subscribed 

on  Incorporation,  at  80% 2,500,000.00 

Promotion  Expenses,  etc..  Payable  in  Cash 100,000.00 

Liabilities  Assumed  by  Company 1,400,000.00 

The  client  does  not  want  your  opinion  as  to  the  policy  of  adopting  the 
appraised  value  for  real  estate,  but  you  are  requested  to  advise  a  sound 
accounting  policy  for  the  treatment  of  real  estate  sold.  The  following  transac- 
tion is  typical : 

Real  estate  of  the  appraised  value  of  $1,000.00  is  sold  for  $1,500.00,  of 
which  40%  is  received  in  cash  and  the  balance  in  ten  notes  of  equal  amounts, 
maturing  semi-annually  over  the  succeeding  five  years.  Give  entries  neces- 
sary to  record  the  transactions,  assuming  the  cash  was  received  and  one  note 
fully  met,  but  foreclosure  followed.  Ignore  the  question  of  interest  on  the 
vendor's  lien  notes. 

(b)  Assume  that  the  bonds  in  question  "a"  are  redeemable  at  par  l.'^ 
years  after  issue,  with  an  option  at  market  price  or  102  at  any  time  thereto. 
A  sinking  fund  is  to  be  provided  by  depositing  with  the  trustee  for  bond- 
holders a  certain  scheduled  price  per  acre  for  all  real  estate  released  from  the 
mortgage.    The  total  scheduled  price  is  $3,750.00. 

Five  years  after  date  of  issue  the  company  had  sold  real  estate  of  the 
appraised  value  of  $1,000,000.00,  which  was  scheduled  at  $500,000.00.  The 
fund  of  $500,000.00  so  deposited  with  trustee  had  been  drawn  upon  for  the 
cancellation  of  bonds  as  follows : 

$200,000.00  par  value  at  102. 

$290,000.00  par  value  at    99. 

The  real  estate  sold  netted  large  profits,  most  of  which  had  been  distri- 
buted in  dividends,  after  writing  ofT  the  total  discount  of  20%  on  the  bonds. 

State  the  bonds  and  sinking  fund  investment  as  they  would  appear  on  the 
financial  statement.  Point  out  in  what  respects,  if  any,  you  consider  the 
directors  acted  unwisely,  and  in  what  respects,  if  any,  they  were  more  con- 
servative than  was  necessary. 

PROBLEM  99 

(Adapted  from  Illinois,  November,  1904) 
The  stockholders  of  a  company  with  bonds  outstanding  of  $500,000,  bear- 
ing interest  at  5%  per  annum,  resolve  to  provide  for  paying  off  the  same  when 
they  fall  due  on  December  3\.  1928,  by  investing  $50,000  per  annum  and 
allowing  the  same  to  accumulate  with  interest ;  this  arrangement  to  com- 
mence with  the  financial  statement  for  the  year  ending  December  31,  1920. 

Show  the  Bond  Redemption  Fund  Accounts  on  December  31.  1924,  on 
the  assumption  that  on  December  31,  1920,  and  on  the  same  day  in  each  year 
following,  the  $50,000  referred  to  was  invested  in  4%  Railroad  Bonds  at  par, 
that  the  interest  thereon  to  June  30,  and  December  31  in  each  year  was 
received  in  July  and  January  following,  and  was  allowed  to  accumulate  in 

91 


the  bank  until  June  30  and  December  31  following,  when  it  was  invested  in 
the  same  class  of  securities  at  the  same  price  in  multiples  of  $1,000. 

If  the  bond  recital  had  provided  for  the  setting  aside  of  $50,000  per  year 
out  of  profits,  show  how  the  accumulation  of  these  amounts  would  appear  on 
December  31,  1928,  before  the  redemption  of  the  bonds.  What  is  the  final 
disposition  of  this  accumulated  amount? 


PROBLEM  100 
(Wisconsin,  1916) 

Corporation  A  issues  50  bonds,  par  value  $50,000.00,  bearing  5  per  cent, 
interest,  payable  annually.  The  bonds  are  numbered  serially,  and  are  to  be 
retired  in  consecutive  groups  of  ten  each  year.  They  are  all  sold  at  date  of 
issue  for  an  average  price  of  $950.00. 

a.  Submit,  in  the  form  of  ledger  accounts,  all  entries  required  to  handle 
this  bond  issue,  in  what  you  consider  the  most  equitable  manner,  from  date 
of  issue  to  retirement. 

b.  Corporation  B  buys  bonds  Nos.  21  to  40,  inclusive,  on  date  of  issue,  at 
$950.00  each,  and  sells  Nos.  21  to  30  at  the  end  of  two  years  for  $1,000.00  each. 
The  other  ten  bonds  are  retired  when  due. 

Submit,  in  the  form  of  ledger  accounts,  all  necessary  entries  in  corpora- 
tion B's  books  for  handling  the  matter  in  what  you  consider  the  most  equitable 
manner. 

Comment. — This  problem  deals  with  discount  on  a  serial  bond  issue.  The  problem 
is  to  be  solved  by  pro-rating  the  discount. 

The  issuing  corporation  pro-rates  the  discount  on  the  entire  issue  while  the  pur- 
chaser pro-rates  the  discount  only  on  the  bonds  purchased.  It,  therefore,  makes  con- 
siderable difference  to  the  purchaser  which  bonds  he  holds.  Is  there  a  profit  reaHzed 
on  the  bonds  sold? 


PROBLEM  101 
(Wisconsin,  1917) 

On  December  15.  1914,  the  stockholders  of  the  A  Corporation  authorized 
an  issue  of  $100,000.00  ten-year  5  per  cent.  First  Mortgage  Bonds.  These 
bonds  were  sold  on  January  1,  1915,  at  95.  On  January  1,  1916,  another  duly 
authorized  issue  of  $100,000.00  twenty-year  6  per  cent,  bonds  was  sold  at  102. 

In  accordance  with  the  terms  of  the  bond  recitals  the  sinking  fund  install- 
ments were  to  be  invested  in  outside  securities,  and  on  January  1.  1916,  a 
portion  of  the  pro  rata  installment  of  the  first  bond  issue  was  used  in  pur- 
chasing 100  Sy2  per  cent,  bonds  of  the  X  Corporations,  at  98.  On  January  1, 
1917,  the  pro  rata  installments  were  invested  as  follows:  Issue  No.  1.  100 
6^  per  cent,  bonds  of  the  T  government  at  102.  Issue  No.  2,  SO  7  per  cent, 
bonds  of  the  W  government  at  par. 

Draft  the  proper  entries  to  record  the  above  transactions,  and  show  the 
ledger  accounts  and  balances  as  of  January  2,  1917.  Interest  calculations 
need  not  be  given. 

Comment. — In  these  problems  journal  entries  for  discount  and  premium  on  bonds 
are  to  be  made.  The  purchases  of  bonds  for  the  sinking  funds  are  to  be  recorded  at 
par.  Purchases  of  an  investment  bond  house  are  not  to  be  confused  with  those  of 
brokers. 

02 


PROBLEM  102 
(New  York,  January,  1914) 

An  investment  bond  house  purchased  10  New  Jersey  Traction  Company 
first  mortgage  5  per  cent,  bonds  at  83;^^ ;  10  New  Orleans  Gas  Light  and 
Power  Company  first  mortgage  5  per  cent,  bonds  at  1.04  (accrued  interest  not 
to  be  considered). 

Prepare  the  necessary  entries  to  record  properly  these  transactions  on  the 
books  of  the  bond  house  and  to  facilitate  an  audit. 

PROBLEM  103 

(New  York,  June,  1915) 

The  Smith  &  Jones  Manufacturing  Company  issued  $200,000.00  of  first 
mortgage  50-year  5  per  cent,  sinking  fund  bonds,  which  were  marketed  at 
98y2  and  1  per  cent,  commission,  and  expended  the  entire  porceeds  in  the  erec- 
tion of  their  plant.  The  discount  and  commission  were  charged  to  Unamor- 
tized Debt,  Discount  and  Expense  Account,  to  be  subsequently  charged  to 
Profit  and  Loss,  proportionately,  during  the  life  of  the  bonds.  Five  years 
later  the  company  was  enabled,  owing  to  a  disturbance  in  the  financial  mar- 
ket, to  purchase  $50,000.00  of  said  bonds  for  sinking  fund  account  at  95.  Pre- 
pare the  necessary  journal  entries  to  record  correctly  the  above  transactions 
on  the  books  of  the  company. 

Comment. — In  this  problem,  the  Unamortized  Debt,  Discount  and  Expense  account 
is  used  as  a  financial  income  and  expense  account.  The  balance  shows  either  a  financial 
profit  or  a  financial  loss. 

PROBLEM  104 

(Wisconsin,  1914  and  1915) 

1.  a.  A  corporation  has  sold  $100,000.00  5  per  cent.  20-year  first  mortgage 
bonds  at  a  premium  of  $4,000.00.  It  also  has  sold  $50,000.00  6  per  cent.  10- 
year  second  mortgage  bonds  at  92.  Using  these  facts  to  illustrate  your  state- 
ments, state  and  explain  the  several  methods  of  accounting  for  premium  and 
discount  on  bonds. 

b.  Assuming  that  your  employer  has  purchased,  as  an  investment,  both 
the  first  and  second  mortgage  bonds  described  in  (a),  set  up  proper  journal 
entries  covering  the  purchase  thereof. 

n.  A  corporation  decided  to  issue  and  sell  bonds  to  the  amount  of  $100,- 
000.00  par  value.  The  denomination  of  such  bonds,  $1,000.00  each;  term  of 
bonds,  fifteen  (15)  years;  interest  rate  5  per  cent,  payable  semi-annually. 
On  January  1,  1914,  these  bonds  were  sold  for  $105,411.33,  or  on  a  4>4  per 
cent,  return  basis.    July  1,  1914,  interest  was  paid  amounting  to  $2,500.00. 

a.  What  entry  should  the  corporation  have  made  when  the  bonds  were 
sold? 

b.  What  entry  should  the  corporation  have  made  when  it  paid  the 
$2,500.00  interest  referred  to  above  ? 

c.  What  entry  should  the  purchaser  of  these  bonds  have  made  when  he 
received  the  first  interest  payment? 

d.  Sketch  the  form  of  a  bond  ledger  which  will  provide  the  purchaser  of 
these  bonds  with  a  perpetual  detail  record  of  this  bond  transaction. 

Comment. — In  part  I,  four  methods  of  treating  bond  discount  and  premium  should 
be  used.     In  answering  "d",  part  II,  columnar  headings  should  be  given. 

98 


PROBLEM  105 
(Florida,  1915) 

A  company  purchased  a  piece  of  real  estate  for  $100,000.00.  The  terms  of 
payment  agreed  upon  were  $10,000.00  each  year  thereafter,  without  interest, 
until  the  whole  $100,000.00  was  paid.  At  the  end  of  the  fourth  year,  twelve 
months  before  the  tifth  payment  was  due,  the  company  found  itself  possessed 
of  considerable  available  cash,  and  decided  to  relieve  itself  of  the  liability 
specified  by  depositing  one  amount  sufficient  to  pay  the  annual  installments 
as  they  matured.  The  bank  agreed  to  pay  5  per  cent,  per  annum  on  all  money 
deposited  for  that  purpose. 

What  is  the  single  amount  which  the  company  must  deposit  at  5  per  cent, 
to  pay  the  yearly  installments  as  they  mature? 

Comment. — In  this  problem  the  student  is  to  find  the  present  worth  of  an  annuity. 
Use  a  table  or  solve  by  simple  long  division. 


PROBLEM  lOi 
(Kansas  and  Missouri,  1915) 

The  present  value  of  an  annuity  of  $1.00  for  four  periods  at  2  per  cent,  is 
$3.80772870. 

What  is  the  value  on  January  1,  1914,  of  a  5  per  cent,  per  annum  bond 
issue  of  $100,000.00,  bought  on  a  4  per  cent,  per  annum  basis  (semi-annual 
coupons),  due  January  1,  1916? 

Prepare  amortization  table  as  follows : 
Date  Total  Interest         Income         Amortization        Book  Value  Par 

2V^%  2%  $100,000.00 

Jan.  1,  1914 
Julyl,  1914 
Jan.  1,  1915 
Julyl,  1915 
Jan.  1,  1916 

Insert  values  under  the  various  heads  to  the  nearest  cent. 

Comment. — There  are  three  methods  by  which  the  problem  may  be  solved.  The 
fact  that  the  annuity  of  one  dollar  for  four  periods  is  given  is  a  good  hint  to  use  the 
information.  However,  the  student  should  be  able  to  solve  the  problem  by  two  other 
methods. 

PROBLEM  107 
(Michigan,  December,  1915) 

A  contractor  proposes  to  build  a  bridge  to  Belle  Isle  and  accept  the  city's 
4  per  cent.  20-year  bonds  to  the  amount  of  $2,000,000.00  in  payment.  He  ad- 
vocates as  a  means  of  retiring  the  bonds  the  establishment  of  a  toll  system 
on  foot  passengers  and  automobiles  at  the  respective  rates  of  1  and  5  cents 
each.  Assuming  the  ratio  of  foot  passenger  to  automobiles  to  be  ten  to  one, 
how  many  of  each  would  be  necessary  to  pay  the  interest  annually  and  create 
a  fund  which,  placed  at  the  same  rate  of  interest,  would  be  sufficient  to  retire 
the  bonds  at  maturity? 

Note:     $1.00  compounded  at  4  per  cent,  for  20  years=2. 191 12314. 

Comment. — Annuities  and  compound  interest  are  involved  in  this  problem.  The 
student  may  make  use  of  the  fact  that  the  amount  of  an  annuity  equals  the  compound 
interest  for  the  period  divided  by  the  rate  per  period. 

94 


PROBLEM  108 

(Adapted  from  Maine,  1916) 
You  are  engaged  in  auditing  the  books  of  a  corporation  for  the  calendar 
year  1920,  and  find  on  the  ledger  an  account  with  Maine  Central  Railroad 
Bonds,  which  was  charged  on  April  1,  1918,  with  $110,072.42  as  the  cost  of 
$100,000.00  first  mortgage  bonds,  payable  January  1,  1923,  and  bearing  interest 
at  6%,  payable  January  1  and  July  1  of  each  year. 

You  observe  that  no  part  of  the  premium  has  been  charged  off,  and  on 
investigation,  you  find  the  following  credits  were  made  to  "Interest  on  Maine 
Central  Bonds"  for  the  interest  received  on  the  bonds : 

July  10,  1918 $3,000 

Jan.     8,   1919 3,000 

July     9,  1919 3,000 

Jan.  12,   1920 .-. .  3,000 

July  10,  1920 3,000 

You  are  informed  that  these  bonds  were  purchased  on  a  4%  semi-annual 
basis.  Possessed  of  this  information  you  are  required  to  prepare  a  schedule 
showing  the  book  value  of  the  bonds  on  April  1,  1918  and  on  July  1  and 
January  1  of  each  year ;  the  interest  received ;  the  income  and  amortization 
for  each  period  on  the  basis  of  which  the  bonds  were  purchased ;  the  conven- 
tional method  being  used  for  the  initial  fractional  period,  so  as  to  furnish 
necessary  information  for  making  future  entries  as  to  income  and  amortiza- 
tion. 

From  this  data  you  are  also  to  submit  the  necessary  journal  entries  to 
adjust  the  accounts  to  December  31,  1920. 


PROBLEM  109 

The  X  Company  is  to  be  formed  with  a  total  capitalization  of  $3,300,000 
for  the  purpose  of  acquiring  the  properties  of  three  companies — A,  B  and  C. 
You  have  been  called  upon  to  work  out  various  bases  of  consolidation  from 
the  facts  they  submit  to  you.  The  average  net  assets  and  the  average  annual 
net  profits  of  each  company  for  the  past  five  years  are  as  follows : 

\  R  C 

Average    Net    Assets $500,000        $1,000,000         $250,000 

Average  Net  Proftts 60,000  60,000  60,000 

Upon  inquiry  you  find  that  the  average  net  profit  was  obtained  from  the 
following  average  operating  statement  of  the  three  companies : 

Sales  $600,000        $750,000        $217,700 

Cost  of  Materials  Used $300,000  $330,000        $  80,000 

Productive   Labor 110,000  180,000  34,900 

Heat,  Light  and  Power 5,000  6,000  3,000 

Depreciation  of  Equipment 10,000  8,000  5.000 

Repairs  to  Equipment 7,500  5,000  5,000 

Property  Taxes   2,000  2,500  1,000 

Sundry  Factory  Expense 5,500  5,000  2,000 

Total  Factory   Cost $440,000        $536,500        $130,900 

Gross  Manufacturing  Profit $160,000        $213,500        $  86,800 

Selling  Expenses 60,000  90,000  15,000 

Trading  Profit $100,000        $123,000        $  71,800 

Office  Salaries $  20,000        $  25,000        $    6,500 

95 


Office  Supplies 2,000  3,000  500 

Sundry  Office  Expense 8,000  10,000  4,800 

Net  Operating  Profit $  60,000      $  60,000        $  60,000 

Interest    Paid $    5,000  $     1,000  $     1,000 

Discount  on  Sales 12,000  6,000  2,000 

Interest    Received 500  750  1,000 

Discount  on  Purchases 8,500  8,250  2,000 

Anticipated  Profits  on  Contracts 5,000 

Profit  on  Sale  of  Stock 1,000  26,000 

Net    Profits $53,000        $93,000        $60,000 

Comment. — It  is  to  be  assumed  that  profits  will  increase  10%  under  the  new 
corporation. 

PROBLEM  110 

Three  manufacturing  concerns  decide  to  consolidate.     It  is  agreed  that 

average  earnings  in  each  case  shall  be  considered  the  average  of  the  last 
three  years  net  operating  profits. 

Net  Operating                            Smith  Harris  Lamb 

Profits                               Company  Company  Company 

1918  16,050  29,500  27,400 

1919  29,300  18,200  27,000 

1920  26,650  24,300  * 

*The  net  operating  profit  for  this  year  should  be  determined  from  the  fol- 
lowing data : 

Trial  Balance — Lamb  Company 

December  31,  1920 

Cash    $16,000 

Customers'  Accounts  24,000 

Reserve  for  Bad  Debts $    2,000 

Materials  Inventory,  Dec.  31,  1920 26,200 

Land  4,000 

Plant  and  Machinery 50,000 

Reserve  for  Depreciation 6,000 

Office  Supplies  Inventory 600 

Creditors  Accounts 12,200 

Dividends  Payable 200 

Capital    Stock 20,000 

Surplus 62,100 

Material  Sales 60,000 

Interest  Received 300 

Cost  of  Material  Sales 32,000 

Selling    Expense 4,000 

Officers'  Salaries 6,000 

$162,800        $162,800 
Inventory  December  31,  1920. 
Office  Supplies,  $200. 
The  average  net  assets  of  the  Smith  Company  were  $400,000  and  of  the 
Harris  Company  were  $200,000.    It  is  agreed  that  the  net  assets  of  the  Lamb 
Company  on  December  31,  1920,  shall  be  taken  as  their  average  net  assets. 

(a)  From  the  preceding  information  you  are  to  prepare  schedules  of 
capitalization  at  6%  on  the  four  different  bases,  one  on  the  assumption  that 
earnings  will  not  increase  and  three  on  the  basis  that  earnings  will  increase 
20  per  cent.  These  schedules  should  show  clearly  the  amount  of  stock  each 
company  receives. 

(b)  Give  the  proper  journal  entry  to  record  each  of  the  above  bases  of 
consolidation  on  the  books  of  the  A  Manufacturing  Company,  which  is  the 
new  Company.  Common  Stock  only  is  to  be  issued. 

96 


PROBLEM  111 
(Illinois,  May,  1914) 

Assume  a  scheme  was  on  foot  for  the  consolidation  of  six  competitive  man- 
ufacturing companies  engaged  in  the  same  line  of  business,  and  that  you  were 
invited  to  formulate  a  scheme  for  the  valuation  of  the  good  will  and  assets 
of  the  respective  companies  that  would  be  fair  and  equitable  to  all  parties. 
Outline  generally  the  plan  you  would  recommend,  dealing  specifically  and 
separately  with  (a)  good  will ;  (b)  plant  and  equipment ;  (c)  inventories  of 
raw  material,  work  in  process  and  finished  stock,  respectively ;  and  (d)  ac- 
counts and  bills  receivable. 


PROBLEM  112 

(Wisconsin,  1915) 

In  a  report  upon  a  proposed  amalgamation  of  two  companies,  state  how 
you  would  treat  the  following  points  in  arriving  at  the  earning  power  of  each 
concern.    Give  reasons  for  your  treatment : 

(a)  Anticipated  profits  on  contracts  in  process. 

(b)  Interest  paid  on  borrowed  capital. 

(c)  Insurance  of  any  description. 

(d)  Wages  paid  general  workmen. 

(e)  Salaries  paid  officers  and  directors. 

(f)  Depreciation  of  plant  and  equipment. 

(g)  Bad  debt  reserves. 

(h)     Repairs,  renewals  and  replacement  of  plant  and  equipment. 

(i)     Taxes. 

(j)     Audit  and  legal  fees. 


PROBLEM  113 
(Wisconsin,  1918) 

The  directors  of  the  Charles  Manufacturing  Company  decide  to  change 
their  plan  of  capitalization  by  retiring  their  common  stock  and  issuing  pre- 
ferred stock  and  new  common  stock  in  place  of  it.  On  December  31.  1917, 
their  books  showed  $1,000,000.00  common  stock  and  $300,000.00  surplus.  The 
new  plan  offered  each  common  stockholder  1.3  shares  of  preferred  .^tock  and 
1  share  of  new  common  stock  for  each  share  of  old  common  stock,  fractional 
shares  amounting  to  $6,400  to  be  redeemable  in  cash.  Amendments  to  the 
articles  of  incorporation  were  dulv  made  providing  an  authorized  amount  of 
$1,500,000.00  of  preferred  stock  and  $2,000,000.00  of  common  stock.  On  April 
1  all  exchanges  had  been  completed,  with  the  following  exceptions:  Unissued 
common  stock.  1,000  shares:  unissued  preferred  stock.  1,300  shares:  frac- 
tional shares,  $300.00.  The  par  value  of  each  kind  of  stock  is  $100.00  per 
share. 

Draft  the  necessary  journal  entry  or  entries  to  record  the  above  changes. 

Comment. — Recapitalization,  involving  good  will  and  fractional  shares,  is  illustrated 
by  this  problem.  If  the  good  will  account  were  not  used  what  would  the  difference 
between  the  par  value  of  the  old  stock  and  new  stock  be  charged  to? 

97 


PROBLEM  114 
(Illinois,  May,  1913) 

In  making  up  a  consolidated  balance  sheet  of  a  holding  or  parent  company 
and  two  subsidary  companies,  where  in  case  of  one  of  the  subsidiary  com- 
panies its  entire  capital  stock  has  been  acquired  at  less  than  par,  and  in  the 
case  of  the  other  at  a  substantial  premium,  how  would  you  deal  with  such 
discount  and  premium,  respectively,  in  the  consolidated  balance  sheet? 

In  the  event  that  all  the  stock  of  the  subsidary  companies  was  not  owned 
by  the  parent  company,  how  should  such  proportions  of  said  stock  belonging 
to  the  minority  stockholders,  together  with  the  proportion  of  surplus  apper- 
taining thereto,  be  stated  in  the  balance  sheet? 


PROBLEM  115 

(Illinois,  May,   1913) 

A  parent  company  holding  notes  receivable  from  a  subsidiary  company  to 
the  extent  of  $100,000.00  indorses  and  discounts  said  notes  with  its  bankers, 
thus  creating  a  contingent  liability  thereunder.  In  preparing  a  consolidated 
balance  sheet  of  the  two  companies,  state  how  and  where  the  liability  would 
appear. 


PROBLEM  116 

(New  York,  June,  1915) 

Two  concerns  failed,  owing  each  other  money,  the  amotmts  of  which  were 
included  in  their  respective  Accounts  Payable  accounts.  A  summary  balance 
sheet  of  A,  which  is  accepted  as  correct,  is  as  follows : 

Balance  Sheet  of  Firm  X 

Due  from  Y $  10,000.00  Due  to  Y $  40,000.00 

All  other  .Xssets 180,000.00  All  other  Liabilities 200,000.00 

Deficit    50,000.00 

$240,000.00  $240,000.00 

A  summary  balance  sheet  of  Y,  which  is  accepted  as  correct,  is  as  follows : 

Balance  Sheet  of  Firm  Y 

Due   from    X $  40,000.00  Due  to  X $  10,000.00 

All  other  Assets 160,000.00  All  other  Liabilities 270,000.00 

Deficit    80,000.00 

$280,000.00  $280,000.00 

The  court  holds  that  it  is  unfair  to  other  creditors  to  allow  such  firms  to 
strike  a  balance  between  their  respective  accounts  and  then  to  settle  with  the 
outside  creditors  on  a  percentage  basis.  Accordingly,  it  is  necessary  to  obtain 
the  "ratio  of  solvency,"  i.  e..  the  percentage  (how  many  cents  on  the  dollar) 
each  concern  will  be  able  to  pay  on  the  basis  of  the  respective  balance  sheets. 
Determine  this  "ratio  of  solvency"  for  each  firm. 

Comment, — This  is  a  problem  in  ratio  and  proportion.  Tt  can  be  solved  by  algebra 
using  two  unknown    quantities. 

9S 


PROBLEM  117 
(Wisconsin,  1914) 

The  balance  sheet  of  the  Richard  Rowe  Manufacturing  Company  on  April 
1,  1913,  was  as  follows: 

Cash $     5,000.00  Notes  Payable  $  30,000.00 

Notes  Receivable 20,000.00  Accounts   Payable    10,000.00 

Accounts  Receivable 50,000.00  Mortgage  on  Real  Estate 10,000.00 

Inv.  Raw  Materials 40,000.00  Capital  Stock  300,000.00 

Inv.  Jol)s  in  Progress 25,000.00  Surplus 5,000.00 

Buildings,   Plant.  Machinery...  120,000.00 

Real  Estate  Holdings 75,000.00 

Good  Will  20,000.00 


$355,000.00  $355,000.00 

April  1,  1914,  the  creditors  forced  the  company  into  bankruptcy  and  you 
have  been  employed  by  the  receiver  to  prepare: 

(a)  .\  comparative  .statement  of  the  book  values  of  the  assets  and  liabili- 
ties as  on  April  1,  of  both  years,  showing  the  changes  in  value  which  led  to 
bankruptcy.  This  statement  to  be  accompanied  with  your  comments  as  to 
changes  in  values. 

(b)  A  statement  of  affairs  and  deficiency  account. 

(c)  A  statement  as  to  the  approximate  dividends  the  creditors  may  ex- 
pect in  settlement  of  their  claims. 

You  obtain  the  following  facts  from  the  books  and  other  sources  of  infor- 
mation as  to  the  condition  of  Richard  Rowe  Manufacturing  Company  on 
April  1.  1914. 

The  capital  stock  has  been  reduced  to  $200,000.00. 

During  the  past  year  new  machinery  amounting  to  $20,000.00  was  pur- 
chased on  the  installment  basis,  $5,000.00  having  been  paid  on  installments 
to  date;. 

The  accounts  receivable  total  $60,000.00,  of  which  $20,000.00  is  in  good 
accounts,  $20,000.00  is  in  doubtful  accounts  expected  to  realize  $10,000.00.  and 
the  remainder  is  considered  worthless. 

A  loan  of  $15,000.00  was  obtained  from  friends  by  giving  a  mortgage  on 
certain  real  estate,  the  book  value  of  which  is  $25,000.00. 

Other  notes  payable  to  the  amount  of  $25,000.00  are  outstanding,  $10.- 
000.00  of  which  is  fully  secured  by  a  mortgage  on  certain  real  estate,  the  book 
value  of  which  is  $15,000.00. 

The  Notes  Receivable  Account  stands  on  the  books  at  $5,000.00.  but  notes 
receivable  and  not  yet  due  to  the  amount  of  $10,000.00  have  been  discounted. 
An  examination  of  these  discounted  notes  shows  that  one  of  $1,000.00  will  be 
dishonored.  The  $5,000.00  of  notes  receivable  on  the  books  will  realize 
$1,000.00. 

Orders  whose  selling  prices  total  $50,000.00  are  on  the  way  through  the 
factory.  The  cost  records  show  that  $20,000.00  has  already  been  spent  upon 
such  orders  and  it  is  estimated  that  $35,000.00  will  have  to  be  spent  to  com- 
plete them  ($5,000.00  of  materials  on  hand  are  included  in  the  $35,000.0^) 
estimate). 

There  is  $500.00  cash  on  hand  and  on  deposit. 

The  trade  accounts  payable  amount  to  $90,000.00. 

The  inventory  of  raw  materials  is  $15,000.00. 

Accrued  wages  of  the  past  month  total  $500.00. 

Taxes  amounting  to  $2,000.00  are  unpaid. 

90 


The  value  of  the  buildings,  plant  and  old  machinery  (book  value  $120,- 
000.00)  is  appraised  at  $30,000.00. 

The  market  value  of  the  unmortgaged  real  estate  is  $5,000.00. 

The  real  estate  mortgaged  to  secure  the  $15,000.00  loan  will  only  meet  that 
claim  and  the  remaining  mortgaged  real  estate  will  bring  its  book  value  in  the 
open  market. 

Prepare  the  statements  for  the  receiver  in  proper  form. 

Comment. — A  comparative  balance  sheet  showing  increases  and  decreases  in  values 
of  accounts,  is  called  for  in  this  problem  as  well  as  a  statement  of  affairs  and  deficiency 
account.    The  information  as  to  values  at  the  later  date  is  found  in  the  notes. 


PROBLEM  118 
(Wisconsin,  1919) 

(a)  State  the  use  for  which  each  of  the  following  kinds  of  charts  are  best 
adapted  in  plotting  business  statistics  : 

Line  or  curve  chart 
Bar  chart 
Circle  chart 
Area  chart 

(b)  On  the  cross  section  paper  given  herewith,  plot  the  following  sta- 
tistics : 

1.  Productive  and  Non-Productive  Labor: 

Productive  Labor  Non-Productive  Labor 

1918                  1919  1918                  1919 

January ; $  4,500.00         $  8,000.00  $  1,750.00        $  4,000.00 

February 5,000.00          10,000.00  1,800.00            5,500.00 

March 4,000.00           10,500.00  1,800.00            5,500.00 

2.  Sales: 

Total  Sales  Sales  Quota 

Brown                Jones  Brown                Jones 

January $10,000.00        $  7,500.00  $12,000.00        $  7,000.00 

February    12,750.00            9,000.00  13,000.00            7.500,00 

March 15,000.00            8,000.00  1.3,500.00            9,000.00 

(c)  State  any  additional  information  necessary  for  proper  interpretation 
of  the  charts  which  you  have  just  prepared. 

Comment. — In  connection  with  the  chart,';  called  for  by  this  problem  the  student  is 
referred  to  Montgomery's  .\uditing,  Students'  Edition,  pages  276-287. 


100 


PART  II 

1.  (a)   What  is  meant  by  a  "classification  of  accounts"? 

(b)  What  different  plans  or  bases  are  there  for  classifying  accounts? 

(c)  Illustrate. 

(d)  Show  by  chart  or  outline  the  various  divisions  and  subdivisions 

of  all  asset,  liability,  income  and  expenditure  accounts. 

(e)  What  are  the  advantages  obtained  through  numbering  accounts? 

(f)  Name  and  briefly  describe  two  methods  of  numbering  or  lettering 

accounts.     (Wisconsin,  1914.) 

2.  (a)   Define  and  distinguish  between  operating  and  non-operating  in- 

come and  expenses. 

(b)  State  the  several  classes  of  non-operating  income  and  expense  and 

give  illustrations  of  each. 

(c)  Distinguish    between    operating   expenses    and    maintenance    ex- 

penses. 

3.  Give  a  typical  operating  statement  for  a  small  mercantile  concern, 
using  your  own  accounts  and  amounts. 

4.  Give  the  items  which  are  to  be  found  in  the  operating  statement  of  a 
manufacturing  concern. 

5.  Mention  some  of  the  points  to  be  considered  in  the  interpretation  of 
the  revenue  account. 

6.  Discuss  three  methods  of  dealing  with  discounts  on  purchases  and  dis- 
counts on  sales. 

7.  What  form  of  the  revenue  account  is  used  in  the  columns  of  news- 
papers and  financial  publications? 

8.  Give  a  revenue  account  for  each  divisional  activity  of  a  business  with 
which  you  are  acquainted. 

9.  Define  and  distinguish  between  a  balance  sheet,  a  financial  statement, 
and  a  statement  of  assets  and  liabilities. 

10.  Name  and  describe  the  various  forms  of  balance  sheets  and  financial 
statements. 

11.  State  the  advantages  and  disadvantages  of  the  working  sheet. 

12.  What  is  meant  by  the  double  account  form  of  balance  sheet  ?  Should 
not  the  double  account  form  of  balance  sheet  be  applied  to  all  commercial 
enterprises? 

13.  Name  two  general  methods  of  arranging  the  items  in  balance  sheets. 
Explain  when  each  of  them  should  be  followed. 

14.  What  are  the  advantages  of  comparative  balance  sheets? 

15.  Build  up  a  typical  financial  statement  briefly  explaining  each  of  the 
items  mentioned  therein. 

16.  Define  depreciation. 

17.  Is  depreciation  an  operating  charge  or  a  division  of  the  net  profits? 

18.  Explain  how  depreciation  is  distinct  from  fluctuation,  appreciation 
and  maintenace. 

101 


19.  Whi^  ■^kf..^'i}^c^T8X(i.\iQConsidertd  in  determining  the  rate  of  de- 
preciation ?       •  " 

20.  How  should  depreciation  be  recorded  upon  the  books  of  account? 

21.  Explain  how  a  Reserve  for  Depreciation  Account  and  a  Depreciation 
Fund  may  be  set  upon  the  books  for  the  writing  off  and  replacement  of  a  given 
asset.    Use  your  own  figures  to  illustrate  your  answer. 

22.  Assume  that  a  Reserve  for  Depreciation  Account  has  been  accumu- 
lated upon  the  books  amounting  to  $1,000.00,  and  that  a  Depreciation  Fund 
has  been  accumulated  of  a  like  amount,  both  for  the  purpose  of  writing  off  and 
replacing  an  asset  of  $1,000.00.  When  this  asset  of  $1,000.00  is  discarded,  the 
scrap  value  is  found  to  be  $100.00  and  an  asset  costing  $1,500.00  is  purchased. 
Give  entries  for  these  facts  upon  the  books  of  account,  and  show  exactly  how 
the  Reserve  for  Depreciation  Account,  the  Depreciation  Fund  and  the  Asset 
Account  stand  when  the  transactions  are  completed. 

23.  The  replacement  value  of  machinery  and  equipment  is  given  as  $225,- 
000.00  in  an  appraisal  recently  made  for  a  company ;  the  sound  value  as  $190,- 
000.00.  The  book  value  of  the  machinery  and  equipment  is  $240,000.00,  and 
the  Reserve  for  Depreciation,  Machinery  and  Equipment  Account  is  credited 
with  $49,000.00. 

(a)  Give  the  necessary  journal  entry  or  entries  which  will  record  the 

proper  facts  upon  the  ledger. 

(b)  State  the  practice  which  the  company  evidently  has  followed  in 

recording  the  purchases  of  new  equipment. 

(c)  Outline  a  system  for  having  data  available  in  compact  form  rela- 

tive to  the  original  cost,  repair,  replacement  and  depreciation  of 
equipment,  and  state  the  relationship  of  such  system  to  the  gen- 
eral financial  accounts.     (Wisconsin,  1918.) 

24.  A  mill  sells  a  lot  of  its  old  machinery  for  $7,300.00  and  credits  the 
amount  to  "Repairs"  Account.  State  (a)  your  opinion  thereof,  and  (b)  the 
reasons  supporting  your  answer.     (Massachusetts,  1911.) 

25.  (a)  State  the  basis  for  determining  the  depreciation   charge  under 

each  of  the  following  methods : 

1.  Fixed  Proportion. 

2.  Fixed  Percentage. 

3.  Sum  of  Year  Digits. 

4.  Composite  Life. 

5.  Annuity. 

6.  Sinking  Fund. 

(b)  State  whether  a  constant,  an  increasing,  or  a  decreasing  depre- 
ciation charge  is  obtained  from  the  use  of  each  of  the  six  meth- 
ods given  under  (a).     (Wisconsin,  1917.) 

26.  A  water  company  finds  it  necessary  to  renew  a  line  of  service  mains 
which  cost  $50,000.00  seven  years  ago.  Double  capacity  is  now  advisable,  for 
which  the  outlay  will  be  $80,000.00.  Depreciation  at  10  per  cent,  per  annum 
has  been  regularly  charged  on  the  first  installation. 

Draft  the  necessary  journal  entries  to  meet  the  essential  facts.  (Illinois, 
May,  1912.) 

27.  Define  Good  Will. 

28.  When  should  Good  Will  be  considered? 

29.  Discuss  the  points  to  be  considered  in  placing  a  valuation  upon  Good 
Will. 

102 


30.  Explain  the  meaning  of  the  word  "Purchase"  as  applied  to  Good  Will. 

31.  Should  Good  Will  be  kept  upon  the  ledger  as  a  fixed  account  or  should 
it  be  written  down  each  year? 

32.  At  the  time  of  taking  inventories  and  closing  its  accounts  preparatory 
to  ascertaining  its  financial  condition,  a  corporation  has  obligations  under 
contracts  to  pay  for  raw  materials  to  arrive  on  which  no  payments  have  been 
made.  At  the  time  of  closing  the  accounts  the  prices  of  the  contracts  are  in 
excess  of  the  market  prices  for  deliveries  corresponding  with  the  contracts. 
State :  (a)  how  this  condition  should  be  reported  in  the  accounts  and  state- 
ment of  financial  condition,  and  (b)  your  reasons.     (Massachusetts,  1911.) 

33.  The  manager  of  a  branch  store  received  instructions  from  his  head 
office  to  forward  the  inventory  of  December  31,  1917,  at  cost  and  selling 
prices.  He  asks  you  to  prepare  the  statement,  since  past  reports  have  been 
based  on  sales  only.  These  prices  include  a  profit  of  20  per  cent.  The  data 
with  which  he  supplies  you  are  as  follows : 

Inventory,  January  4,  1918,  $98,000.00. 

Merchandise  received  December  31,  1917,  to  January  4,  1918.  $1,000.00. 

Sales  for  this  period,  $1,200.00. 

34.  In  examining  the  business  to  determine  and  show  separately  the 
profits  for  two  years  ending  December  31,  1916,  it  is  found  that  an  item 
amounting  to  $500.00  has  been  omitted  from  the  inventory  of  December  30. 
1914,  that  an  error  has  been  made  in  the  footing  of  the  inventory  of  December 
31,  1915,  by  which  that  inventory  was  overstated  to  the  amount  of  $250.00. 
and  that  in  pricing  the  inventory  of  December  31,  1916,  an  error  was  made  by 
which  that  inventory  was  understated  to  the  amount  of  $1,000.00.  State  fully 
the  effect  of  these  errors  on  the  profits  of  each  of  the  two  years.  (Louisiana, 
1917.) 

35.  It  is  generally  conceded  that  merchandise  inventories  should  be  cal- 
culated on  "cost"  prices,  but  in  practice  there  are  found  many  diflferences  in 
the  method  of  determining  the  cost  price. 

State  whether  or  not  the  following  items  should  be  regarded  in  arriving  at 
this  cost,  giving  your  reason  in  each  case  : 

Cash  Discounts. 

Trade  Discounts. 

Freight  Inward. 

Freight  Outward. 

Rebates  and  premiums,  such  as  are  found  in  connection  with  the  tobacco 
business. 

Draying  and  handling  (inward). 

Packing  and  draying  (outward).     (Florida,  1915.) 

36.  (a)  Upon  what  theory  is  the  maxim  based  that  inventories  should  be 

valued  at  cost  or  market  value,  whichever  is  lower  at  the  date 
of  the  balance  sheet ;  and  under  what  circumstances,  if  any,  is 
it  permissible  to  value  raw  materials  at  market  prices  for  bal- 
ance sheet  purposes,  where  said  market  prices  are  in  excess  of 
cost  owing  to  a  gradual  or  sudden  rise  in  prices  after  the  ma- 
terials were  purchased? 
(b)  Assuming  an  automobile  manufacturing  company  made  a  con- 
tract for  rubber  tires  at  $35.00  each  with  the  understanding 
that  it  was  to  receive  a  rebate  of  $5.00  a  tire  if  the  purchases 
exceeded  40,000  tires,  and  that  at  the  end  of  the  season  when 

103 


the  accounts  were  made  up,  say  on  July  31,  it  was  found  that 
45,000  tires  had  been  purchased  and  a  claim  for  the  rebates 
were  thereupon  made  and  a  check  in  settlement  was  received 
on  August  31  following.  On  July  31  there  were  15,000  tires 
on  hand.  At  what  price  should  they  be  valued  for  inventory 
purposes,  and  how  should  the  rebate  be  dealt  with  in  the  ac- 
counts for  the  year  ending  July  31  ?    (Illinois,  1914.) 

37.  Define  a  partnership.  With  what  phases  of  the  partnership  organiza- 
tion and  accounts  is  the  accountant  most  concerned? 

38.  State  the  accounting  clauses  which  should  be  in  partnership  agree- 
ments. 

39.  Why  is  it  necessary  for  partners  to  have  Investment  (or  Capital) 
and  Drawing  (or  Personal)  accounts?  Show  the  relationship  which  exists 
between  them. 

40.  State  and  explain  at  least  three  methods  of  dividing  the  profits  or 
losses  of  a  partnership. 

41.  Explain  why  interest  on  investment  is  frequently  allowed  in  part- 
nerships. 

42.  Show  the  effect  of  not  allowing  for  interest  on  investments  in  part- 
nerships. 

43.  If  capital  investments  are  equal  but  profits  and  losses  are  divided  un- 
equally, and  if  interest  on  investment  is  not  allowed,  which  partner  loses? 
Illustrate  your  answer  with  figures. 

44.  If  profits  are  divided  equally,  but  capital  investments  are  unequal, 
and  if  interest  on  investment  is  not  allowed,  which  partner  loses?  Illustrate 
your  answer  with  figures. 

45.  If  capital  investments  are  equal,  and  profits  and  losses  are  divided 
equally,  what  is  the  effect  of  allowing  for  interest  on  investment?  Illustrate 
your  answer  with  figures. 

46.  Explain  how  interest  on  investment  may  be  credited  directly  to  the 
partners'  accounts  rather  than  be  thrown  into  an  interest  account,  closed  into 
profit  and  loss,  and  then  transferred  to  the  partners'  accounts. 

47.  Explain  at  least  three  methods  of  admitting  a  new  partner.  Illustrate 
your  answer  with  figures. 

48.  When  a  partnership  is  dissolved,  how  are  assets  distributed? 

49.  Explain  how  profits  or  losses  resulting  from  a  partnership  dissolution 
should  be  borne  by  several  partners. 

50.  The  following  is  a  trial  balance  of  the  general  ledger  of  a  partnership 
in  which  the  profits  are  shared  equally  at  the  end  of  the  first  year  of  its 
existence : 

Buildings  and  Equipment $  6,000.00 

Merchandise  and  Materials 7,000.00 

Accounts  Receivable    4,000.00 

Profit  and  Loss  Account 5,700.00 

John  Smith,  Drawing  Account 2,500.00 

George  Jones,  Drawing  Account 1,300.00 

Arthur  Morris,   Drawing  Account 2,000.00 

John  Smith,  Capital  Account $  10,000.00 

George  Jones,  Capital  Account 8,500.00 

Arthur  Morris,  Capital  Account 6,500.00 

Accounts  Payable  3,500.00 

104 


The  firm  decided  to  sell  the  business  out  and  to  dissolve  the  partnership 
and  procured  a  purchaser  who  offered  the  sum  of  $50,000.00  for  the  business, 
including  good  will,  etc.  The  oft'er  was  ultimately  accepted  on  the  under- 
standing that  the  purchaser  would  assume  all  existing  liabilities,  which  he 
agreed  to  do,  and  the  sale  was  forthwith  consummated. 

State  how  the  proceeds  of  the  sale  should  be  apportioned  among  the  part- 
ners, showing  the  amount  each  would  receive.     (Illinois,  May,  1914.) 

51.  A  corporation  manufacturing  explosives  is  compelled  to  pay  exorbi- 
tant rates  for  a  very  limited  amount  of  insurance,  and  in  consequence  was 
obliged  to  install  an  automatic  sprinkler  system  at  a  cost  of  $75,000.00.  This 
additional  fire  protection  enabled  them  to  secure  a  full  line  of  insurance, 
though  in  mutual  companies,  and  at  a  much  lower  rate  than  was  obtainable 
prior  to  such  installation.  At  the  end  of  the  fiscal  year  the  company  received 
dividends  from  these  mutual  insurance  companies  aggregating  $2,000.00.  To 
what  account  should  the  cost  of  the  sprinkler  system  be  charged  and  to  what 
account  should  this  dividend  be  credited?  State  your  reasons  fully.  (Louisi- 
ana, 1917.) 

52.  A  clothing  store  carries  fire  insurance  to  the  amount  of  $30,000.00  on 
a  stock  of  $50,000.00.  The  policies  contain  the  80  per  cent,  co-insurance 
clause.  State  (a)  the  amount  collectible  if  a  partial  loss  of  $15,000.00  were 
suffered,  and  (b)  the  amount  collectible  if  a  total  loss  occurred. 

(c)  If  you  believe  that  a  merchant  should  carry  one  hundred  per  cent, 
insurance  protection  upon  his  property,  draft  the  entry  or  entries  to  record  the 
annual  insurance  charge.  Assume  that  it  is  only  necessary  for  him  to  carry 
80  per  cent,  in  outside  companies  to  take  advantage  of  the  co-insurance  clause. 
(Wisconsin,  1918.) 

53.  A  fire  in  a  manufacturing  concern  resulted  in  a  loss  on  machinery 
$5,000.00,  merchandise  (raw  material)  $10,000.00,  manufactured  goods  $25^- 
000.00,  which  amount  of  $40,000.00  was  agreed  on  and  paid  by  the  insurance 
companies.  Give  the  entries  necessary  to  record  properly  the  above  transac- 
tions on  the  books  of  the  concern.     (New  York,  1914.) 

54.  The  Insurance  Account  as  kept  upon  the  books  of  the  Good  Merchan- 
dise Company  is  charged  with  the  premiums  paid  on  the  following  kinds  of 
insurance :  Fire  Insurance  on  Buildings,  Merchandise  and  Fixtures ; 
Sprinkler  Leakage ;  Employer's  Guarantee  Bond ;  Safe  Burglary ;  Robbery 
and  Hold  Up ;  Automobile  Fire,  Theft  and  Liability ;  General  Liability ;  Ele- 
vator Liability ;  Steam  Boiler ;  Tornado ;  Plate  Glass ;  Use  and  Occupancy ; 
Insurance  on  Officers'  Lives. 

You  are  asked  to  indicate  the  proper  treatment  to  be  given  each  of  the 
above  items ;  i.  e.,  indicate  the  name  of  the  account  or  accounts  to  which  they 
should  be  charged,  give  the  adjusting  entries,  state  the  section  of  the  revenue 
account  or  income  statement  in  which  each  would  appear,  etc.  (Wisconsin, 
November,  1919.) 

55.  The  partnership  "Black  &  White"  has  insured  the  lives  of  its  partners 
for  equal  amounts.  The  policies  are  payable  to  the  firm.  Permiums  have 
been  paid  for  five  years,  (a)  Show  the  annual  entries  for  each  of  the  five  years. 

At  the  end  of  the  fifth  year  "White"  dies,  (b)  What  would  be  the  proper 
entries  to  make  upon  receipt  of  the  amount  of  the  policy?    (Wisconsin,  1915.) 

56.  Should  a  corporation  borrow  money  ?  What  percentage  of  the  capital 
employed  by  a  corporation  is  usually  borrowed  money? 

105 


57.  Explain  why  a  corporation  should  borrow  money,  illustrating  it, 
using  your  own  figures, 

58.  What  are  the  three  general  sources  from  which  a  corporation  may 
borrow  money?  Explain  the  types  of  the  security  given  according  to  the 
sources  of  the  funds  obtained. 

59.  Define  a  mortgage  bond ;  a  debenture  bond ;  an  income  bond ;  a  col- 
lateral trust  bond. 

60.  The  stockholders  of  a  corporation  authorize  an  issue  of  $1,0(X),CXX).00 
of  bonds ;  $500,000.00  of  these  bonds,  duly  registered  and  certified  by  the  trus- 
tee, were  returned  to  the  corporation  and  disposed  of  as  follows : 

The  corporation  sold  $200,000.00  for  cash,  pledged  $200,000.00  as  collateral 
security  for  the  payment  of  its  notes,  and  retained  $100,000.00. 

How  should  this  issue  of  bonds  appear  on  the  balance  sheet  of  the  cor- 
poration?   (New  York,  January,  1914.) 

61.  What  is  a  sinking  fund? 

62.  Assuming  that  a  corporation  has  issued  $100,000.00  of  ten-year  first 
mortgage  bonds,  and  that  the  trust  deed  provides  that  there  shall  be  set  aside 
annually  an  amount  sufficient  to  redeem  the  bonds  at  maturity,  give  the 
necessary  journal  entries  attending  the  issuance  of  the  bonds,  the  annual  en- 
tries, and  the  final  entries  when  the  bonds  are  redeemed. 

63.  (a)  Compare  the  serial  plan  of  bond  redemption  with  the  sinking  fund 
method.    Which  is  preferable  and  why? 

(b)  A  municipality  has  built  a  public  building  from  the  proceeds  of  a 

bond  issue.    Should  the  municipality  write  off  depreciation  on 
the  building  and  at  the  same  time  also  create  a  sinking  fund? 

(c)  State  the  various  ways  of  calculating  contributions  to  a  sinking 

fund. 

(d)  How  may  sinking  funds  be  invested? 

(e)  How  may  a  sinking  fund  appear  upon  a  balance  sheet? 

(f)  Discuss  the  disposition  of  a  sinking  fund  reserve  account  which 

is  no  longer  necessary. 

(g)  Are  sinking  fund  reserve  appropriations  a  satisfactory  protection 

to  the  bondholder?    (Wisconsin,  1916.) 

64.  (a)  The  present  tendency  of  industrial  corporations  seems  to  be  to 
issue  preferred  stock  rather  than  bonds.  As  evidence  of  your  familiarity  with 
this  tendency,  you  are  asked  to  detail  the  more  important  of  typical  prefer- 
ential and  protective  features  of  preferred  stocks  now  being  marketed.  Enu- 
merate some  of  the  reasons  why  the  public  would  buy  such  preferred  stock 
rather  than  bonds. 

(b)  Compare  the  sinking  fund  provisions  of  typical  preferred  stock 
issues  with  the  sinking  fund  provisions  of  typical  bond  issues 
as  to  entries  to  be  made : 

1.  When  the  sinking  fund  is  set  up. 

2.  When  the  purpose  of  creating  the  sinking  fund  has  been  at- 

tained. 

3.  When  any  balances  remain  in  the  sinking  fund  or  allied  ac- 

counts.    (Wisconsin,  November,  1919.) 

65.  What  is  the  distinction  between  appropriated  and  free  surplus? 

106 


(:^.  Is  discount  on  bonds  a  capital  or  a  revenue  charge?  Is  premium  on 
bonds  a  credit  to  capital  or  to  revenue. 

67.  What  does  the  Interstate  Commerce  Commission  require  in  connec- 
tion with  the  recording  and  the  financial  presentation  of  premiums  and  dis- 
counts on  bonds,  and  the  premiums  and  discounts  on  stocks?  State  the  theo- 
retic reason  for  the  difiference,  if  any,  in  the  handling  of  these  two  classes  of 
facts.     (New  York,  January,  1914.) 

68.  In  auditing  the  books  of  a  corporation,  you  discover  that  a  portion  of 
its  capital  stock  has  been  sold  at  a  premium  and  the  premium  utilized  for  the 
payment  of  dividends. 

(a)  What  criticism  of  this,  if  any,  would  you  make  in  your  report? 

(b)  Had  this  company  acquired  treasury  stock  at  par  and  sold  it  at 

a  premium,  utilizing  the  premium  for  the  payment  of  divi- 
dends, would  your  criticism  be  the  same?  Why?  (Ohio, 
1918.) 

69.  Define  amortization.  State  three  methods  of  accounting  for  the  pre- 
mium or  discount  on  stocks  and  bonds.    Which  is  preferable,  and  why  ? 

70.  A  firm  purchased  ten  $1,000.00  bonds  at  97^^,  due  January  1,  1915, 
bearing  5  per  cent,  interest,  payable  semi-annually.  What  procedure  would 
you  adopt  to  care  for  the  discount  at  maturity?     (New  York,  January,  1914.) 

71.  A  corporation  decided  to  issue  and  sell  bonds  to  the  amount  of  $100,- 
000.00  par  value.  The  denomination  of  such  bonds,  $1,000.00  each;  terms  of 
bonds,  fifteen  (15)  years;  interest  rate  5  per  cent,  payable  semi-annually.  On 
January  1,  1914,  these  bonds  were  sold  for  $105,411.33,  or  on  a  4^<^  per  cent, 
return  basis.    July  1,  1914,  interest  was  paid  amounting  to  $2,500.00. 

(a)  What  entry  should  the  corporation  have  made  when  the  bonds 

were  sold? 

(b)  What  entry  should  the  corporation  have  made  when  it  paid  the 

$2,500.00  interest  referred  to  above? 

(c)  What  entry  should  the  purchaser  of  these  bonds  have  made  when 

he  received  the  first  interest  payment? 

(d)  Sketch  the  form  of  a  bond  ledger  which  will  provide  the  pur- 

chaser of  these  bonds  with  a  perpetual  detail  record  of  this 
bond  transaction.     (Wisconsin,  1915.) 

72.  Define  capitalization. 

Th.  What  bases  are  used  in  determining  the  capitalization  of  a  corpora- 
tion ? 

74.  Discuss  in  detail  the  earning  power  basis  for  capitalizing  corpora- 
tions. 

75.  Is  there  a  distinction  between  watered  stock  and  stock  covered  by 
the  earning  power  but  not  by  physical  assets  ? 

76.  Discuss  the  subject  of  consolidation  of  corporatioas. 

77.  A  financing  corporation  which  had  paid  $450,000.00  for  six  patents  of 
equal  value  sold  one  of  these  patents  during  the  first  year  of  its  existence  and 
received  as  the  consideration  for  the  sale  1,500  shares  of  preferred  stock  (par 
value  $100.00)  in  a  subsidiary  company  organized  for  the  purpose  of  working 
the  patent.     During  the  second  year  of  its  life  the  financing  corporation  sold 

107 


the  1,500  shares  of  preferred  stock  for  $100,000.00.  State  how  you  would 
treat  the  accounts  in  respect  to  these  two  transactions  in  the  financing  cor- 
poration at  the  end  of  the  first  and  second  years,  respectively.  (North  Da- 
kota, 1918.) 

78.  In  the  general  ledger  of  a  corporation  is  a  controUing  account  for 
the  Accounts  Receivable ;  the  individual  accounts  relating  thereto  being  kept 
in  an  Accounts  Receivable  ledger.  The  balance  of  thre  controlling  account  is 
$550,000.00.  The  total  of  the  balances  at  the  debit  of  the  individual  accounts 
is  $590,000.00;  the  total  of  the  balances  at  the  credit  of  the  individual  accounts 
is  $40,000.00.  The  corporation  issues  to  banks  a  balance  sheet  showing  its  ac- 
counts receivable  as  $550,000.00.  State  (a)  whether  you  approve  of  same ; 
(b)  if  you  differ,  what  you  would  enter  in  the  balance  sheet ;  and  (c)  your 
reasons.    (Massachusetts,  1911.) 

79.  The  amount  of  outstanding  accounts  receivable  by  a  selling  house  for 
account  of  a  consignor,  whose  account  is  unguaranteed,  is  $762,000.00;  the 
selling  house  had  advanced  thereon  to  the  consignor  $80,000.00.  The  con- 
signor shows  in  his  balance  sheet:  "Outstanding  accounts  receivable,  $682,- 
000.00,"  as  embracing  the  above.  State  (a)  your  opinion  of  the  propriety 
thereof,  and,  if  you  would  treat  items  differently,  (b)  how  and  (c)  why. 
(Massachusetts,  1911.) 

80.  Should  a  manufacturing  concern  charge  its  goods  sent  to  branch 
houses : 

(1)  At  selling  price,  or 

(2)  At  the  prevailing  wholesale  price  of  the  same  or  similar  goods  in 

the  open  market,  or 

(3)  At  cost? 

State  advantages  and  disadvantages  of  each  method.  (Colorado,  1914.) 

81.  (a)  Explain  the  treatment  you  would  give  the  following  in  the  books 
of  account: 

(b)   State  the  counterbalancing  or  offsetting  accounts, 
(c)   Explain  how  they  would  appear  in  the  balance  sheet : 

(1)  Note  receivable  discounted. 

(2)  Actions  pending  against  your  client. 

(3)  Cumulative  preferred  dividends  payable. 

(4)  Liability  as  guarantor  for  third  parties. 

(5)  Liability  as  accommodation  signer  on  note. 

(6)  Contingent  liabilities  under  contracts. 

(7)  Unpaid  balances  on  contracts  not  yet  fulfilled. 

(8)  Collateral  in  possession  of  your  banker  to  secure  payment  of 

a  note.     (Wisconsin,  1915.) 

82.  You  are  engaged  to  verify  the  financial  statement  of  a  corporation 
after  the  books  and  accounts  have  been  closed.  Your  investigation  discloses 
the  fact  that  the  following  items  have  not  been  provided  for  on  the  books  and 
accounts  at  the  closing  date : 

1.  Unexpired  insurance  premiums. 

2.  Prepaid  interest  on  notes  payable. 

3.  Depreciation  on  buildings. 

4.  Excess  of  appraisal  over  book  value  of  machinery. 

5.  Sinking  fund  reserve  for  payment  of  bonds  called  for  by  the  trust 

deed. 

6.  Taxes  for  current  year  not  payable  until  following  year. 

108 


7 .  Capital  stock  issued  in  payment  of  patent  rights  acquired. 

8.  Cash  surrender  value  of  life  insurance. 

9.  Accounts  payable  for  merchandise  intransit. 

10.  Cash  discount  on  customers'  accounts  receivable. 
Prepare  the  journal  entries  necessary  to  adjust  the  accounts  in  conformity 
with  the  above  facts,  using  arbitrary  figures  and  explaining  the  reasons  for 
your  journal  entries.     (Missouri,  1916.) 

83.  State  your  opinion  on  the  use  of  diagrams,  charts  or  graphs,  giving 
at  least  three  methods  of  showing  diagrammatically  the  earnings  and  ex- 
penses of  a  mercantile  or  manufacturing  concern. 

State  how  you  would  prepare  curves  showing  the  monthly  results  accom- 
plished, and  what  particular  sets  of  figures  you  would  use  as  conveying  the 
most  important  information,  using  the  following  example : 

Gross  Sales $320,000.00  per  annum 

Cost  of  Goods  Sold 260,000.00     " 

Expenses  of  Handling  30,000.00      " 

Expenses,  Overhead   10,000.00      " 

(Florida,  1915.) 

84.  A  manufacturer  finds  that  during  three  months  his  goods  have  cost 
per  cent,  on  the  sale  price : 

Raw  Material  30 

Wages 20 

Rent,  etc 05 

Fuel 10 

General  Expenses   15 

80 
What  should  he  add  to  his  selling  price  to  obtain  the  same  profit  if  the 
following  advances  take  place? 

Coal  .    SO  per  cent,  advance 

Material 5  per  cent,  advance 

\^'^ages 21/2  per  cent,  advance 

(Illinois,  1909.) 

85.  A  coal  mine  is  operated  under  a  twenty-year  lease  at  a  royalty  of  10 
cents  per  ton,  but  for  which  a  minimum  payment  of  $5,000.00  per  annum  must 
be  made.  After  the  third  year  an  arrangment  was  effected  between  the  lessor 
company  and  the  lessee  company  whereby  the  minimum  royalties  were  to 
apply,  if  in  excess  of  the  tonnage  mined,  against  future  operations.  In  the 
first  year  25,000  tons  were  mined;  in  the  second,  26,500;  in  the  third,  24,600; 
in  the  fourth,  31,000;  and  in  the  fifth,  30,500  tons.  Journalize  these  transac- 
tions and  state  how  the  respective  royalties  paid  would  aflFect  the  Profit  and 
Loss.  Account  and  balance  sheet.     (Washington,  1917.) 

86.  John  Barton  leases  a  coal  mine  from  Thomas  Sutton  upon  the  fol- 
lowing terms:  At  a  royalty  of  25  cents  a  ton  as, rental,  with  an  annual  mini- 
mum of  $500.00 — the  privilege  being  given  to  recover  "dead"  or  "unearned" 
minimum  rent  within  a  period  of  20  years. 

Draft  the  journal  entries  relative  to  the  following  output  for  five  years: 

1st  year 1,000  tons      4th    year 1,800  tons  (strike) 

2nd  year 2,500  tons      5th  year 3,800  tons 

3rd  year 4,500  tons 

(Illinois,   1912.) 

109 


87.  The  Good  Music  Company  sells  pianos  on  the  installment  basis.  On 
January  2,  1914,  Jones  purchased  a  piano  from  the  company  for  $375,  to  be 
paid  for  as  follows :  $25.00  down  and  the  balance  in  quarterly  installments  of 
$50.00  each,  bill  of  sale  to  be  given  on  date  of  final  payment.  The  piano  cost 
the  company  $125.00.  The  four  installments  for  1914  were  duly  received,  the 
last  one  having  been  paid  on  December  31st. 

(a)  Set  up  the  proper  ledger  accounts  covering  this  sale  and  the  pay- 

ments thereon. 

(b)  Give  the  journal  entry  (at  the  close  of  the  year)  by  which  the 

year  will  be  credited  with  its  proper  proportion  of  the  profit 
of  the  transaction. 

(c)  Sketch  the  ruling  of  a  book  or  books  which  might  be  used  to  facili- 

tate the  handling  of  installment  sales  and  collections.  (Wis- 
consin, 1915.) 

88.  The  authorized  capital  stock  of  a  corporation  is  $500,000.00,  divided 
into  5,000  shares,  par  value  $100.00.  Of  this  amount  $400,000.00  has  been  sub- 
scribed and  paid  for  in  full.  The  corporation  purchases  ten  shares  of  a  dissat- 
isfied stockholder  for  $75.00  a  share,  and  five  other  stockholders  each  donate 
five  shares  to  the  company.  Five  shares  of  the  purchased  stock  and  all  of  the 
donated  stock  are  sold  for  $50.00  a  share. 

(a)  Draft  proper  entries  and  show  the  ledger  accounts  and  balances. 

(b)  How  would  the  balances  of  the  accounts  in  (a)  appear  in  a  bal- 

ance sheet? 

(c)  Give  the  entries  and  show  the  ledger  accounts  and  balances  if 

the  capital  stock  were  of  no  specified  par  value,  but  5,000 
shares  had  been  issued  at  $80.00  and  the  other  conditions  re- 
main as  stated  in  the  first  paragraph. 

(d)  How  would  the  balances  of  the  accounts  in  (c)  appear  in  a  bal- 

ance sheet?     (Wisconson,  1917.) 

89.  A  corporation's  profits  for  the  year  ended  December  31,  1912,  amount 
to  $451,000.00.  The  by-laws  require  a  reserve  equal  to  10  per  cent,  of  any 
dividend  paid  to  the  common  stockholders,  and  any  surplus  remaining  after 
such  dividend  is  paid  is  also  to  be  applied  to  the  reserve  until  such  reserve  ac- 
count amounts  to  $250,000.00.  The  reserve  on  December  31.  1911.  was  $156,- 
020.00.  The  capital  is  $2,000,000.00— one-half  cumulative  preference  5  per 
cent,  and  one-half  common,  all  fully  paid. 

On  December  31,  1912,  the  preferred  dividend  is  two  and  one-half  years  in 
arrears.  On  December  31,  1911,  Profit  and  Loss  Account  was  in  debit  $202,- 
000.00.  Set  out  your  treatment  of  the  profit  for  1912  with  a  few  concise  com- 
ments.    (Colorado,  1914.) 

90.  The  books  of  a  corporation  (with  a  capital  stock  of  $800,000.00)  at 
the  beginning  of  the  last  fiscal  year  showed  a  surplus  of  $28,450.00. 

During  your  examination,  immediately  subsequent  to  the  close  of  the  fiscal 
year,  you  learn  the  following  facts : 

That  the  net  profit  on  goods  delivered  to  customers  during  the  year 
amounted  to  $115,350.00. 

That  prior  to,  and  at  the  close  of  the  year,  the  company  owned  bona  fide 
contracts  for  the  delivery  of  goods  during  the  next  few  months. 

That  the  company  had  purchased  a  sufficient  quantity  of  merchandise  in 
order  to  fill  these  contracts. 

That  the  company,  after  making  due  allowances  for  all  production  cost, 

110 


expenses  incidental  to  the  delivery  of  the  contract  goods,  cost  of  selling,  etc., 
had  arrived  at  a  net  profit  amounting  to  $51,120,  which  was  carried  to  Profit 
and  Loss  Account.    This  made  a  total  net  balance  of  $166,470.00. 

That  there  was  declared  and  paid  a  dividend  of  20  per  cent,  (or  $160,000.00) 
and  that  $6,470.00  was  carried  to  Surplus  Account. 

Would  you  consider  it  necessary  to  call  particular  attention  to  this  matter 
in  your  report  to  the  stockholders?    State  your  reasons.     (Wisconsin,  1914.) 

91.  A  corporation  has  two  classes  of  stock  fully  issued:  $5,000,000.00  7 
per  cent,  cumulative  preferred  as  to  dividend  and  assets ;  10  per  cent,  divi- 
dends are  in  arrears.  $12,000,000.00  common,  on  which  no  dividend  has  been 
paid. 

The  corporation  proposes  to  retire  by  purchase  $2,000,000.00  common. 
What  would  be  the  effect,  if  any,  on  the  interests  of  the  preferred  stock- 
holders?   Give  reasons  supporting  your  answer.     (Massachusetts,  1911.) 

92.  The  Jones  Manufacturing  Company,  needing  a  larger  building  for  its 
increasing  business,  finds  a  property  desirable  in  every  respect  excepting  that 
the  building  is  much  larger  than  is  necessary.  They  lease  the  property  at  an 
annual  rental  of  $18,000.00,  after  considering  that  they  can  probably  sub- 
lease part  of  the  building.  Owing  to  the  desirability  of  the  property  and  other 
favorable  conditions  they  execute  a  sub-lease  for  one-half  of  the  building  at 
an  annual  rental  of  $18,000.00.  How  would  you  treat  these  facts  in  compiling 
the  annual  income  statement  of  the  Jones  Manufacturing  Company.  (Wis- 
consin, 1915.) 

93.  A  manufacturing  company  offers  premiums  costing  75  cents  each  to 
its  customers  on  the  return  of  100  of  its  wrappers.  The  company  invested 
$5,000.00  in  premiums  and  sold  $500,000.00  units  of  the  commodity  during  the 
year.  You  find  that  300,000  of  the  wrappers  have  been  redeemed,  while  it  is 
estimated  that  20  per  cent,  will  not  be  presented  for  redemption.  At  the  end 
of  the  year  how  would  you  treat  this  matter  in  the  preparation  of  the  revenue 
account  and  balance  sheet?     (Wisconsin,  1915.) 


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